Q3 2024 Plymouth Industrial REIT Inc Earnings Call
Good morning and welcome to the Plymouth Industrial REIT conference call to review the company's results for the third quarter of 2024.
To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. 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.
Speaker Change: In addition to these earnings documents, a copy of our 10-Q1 file can be found on the SEC filing page of the IR site.
Speaker Change: Our supplemental deck includes our full year 2024 guidance assumptions, detailed information on our operations, portfolio and balance sheet, the definitions of non-GAAP measures, and reconciliations to the most comparable GAAP measures.
Speaker Change: With me today is Jeff Witherell, Chairman and Chief Executive Officer, Anthony Saladino, Executive Vice President and Chief Financial Officer, Jim Conley, Executive Vice President of Asset Management, and Anne Hayward, General Counsel.
Speaker Change: I'd like to point everyone to our forward-looking statements on page one of our supplemental presentation. I encourage you to read them carefully.
Speaker Change: They applied the statements made in this call, our press release, our prepared commentary and in our supplemental financial information. I'll now turn the call over to Jeff Witherell.
Jeff Witherell: Thanks Tripp. Good morning and thank you for joining us today. I'll hit a few highlights first and then we'll go to Q&A.
Jeff Witherell: We've made some big announcements the past few months relating to securing capital that can propel our growth. In late August, we announced the strategic transaction with 6th Street. I view this as transformative for us in several respects.
Jeff Witherell: We secured a tremendous partner in 6th Street, who has continued to build out their real estate platform.
Jeff Witherell: With this increase in the revolver in recasting of one of the term loans, we've extended our maturities and enhanced the ability to pursue other unsecured debt.
Jeff Witherell: The combination of 6th Street and the additional borrowing capacity solves our current capital needs.
Jeff Witherell: Our focus for the balance of this year and throughout 2025 is on our leasing opportunities and putting the capital to work.
Jeff Witherell: Our earnings release and prepared commentary outlined a few tenant challenges we faced during the quarter that we did not anticipate.
Jeff Witherell: We are confident that we will work through these and get the spaces leased.
Jeff Witherell: We've always done a great job of keeping our buildings well leased and expect that Plymouth will have a greater exit velocity and momentum wrapping up this year. That will set us up for a strong 2025.
Jeff Witherell: We're off to a good start on the acquisitions front with the Memphis portfolio we completed during the quarter. We have another portfolio under contract in Cincinnati that we're excited about.
Jeff Witherell: We know these markets well, and we now have the capital to expand our scale.
Jeff Witherell: I look forward to providing more updates over the next several months on how we're progressing with the leasing and capital deployment.
Speaker Change: I would now like to turn it over to the operator for questions.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you are 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 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Mitch Germain with Citizens JMP. Please go ahead.
Good morning. So
Jeff Witherell: Jeff, maybe just talk about some of the issues that arrived. I mean, I know you have them in your...
Speaker Change: prepare comments but I think last quarter you mentioned an issue in Cleveland that was unanticipated but it seems like you know now you have some other vacancies that
Speaker Change: were realized that, I guess, were they unanticipated or the lease was delayed? Can you just maybe describe a little bit more detail about those different situations?
Speaker Change: Yeah, sure Mitch. Jim Conley is here. As you know, he heads up asset management. So he's got all the detail on that, so we'll let him walk you through it.
So starting off with Cleveland
Speaker Change: We had two issues in Cleveland, one at 2100 International Parkway with a tenant.
Speaker Change: was up-to-date through Q2 on rent but abruptly laid off all his employees in forms they couldn't pay rent. So we evicted them effective 930 and taken legal action against them.
Speaker Change: for whatever rent they owe us and in future rent. At the end of Q2, we were pretty far along with a half-building user.
Speaker Change: But that they put that deal on hold. However, now we're
Speaker Change: with a full building user that wants to take the building at the beginning of 2025. So, I mean, we acted pretty quickly and got a tenant identified. We also have a backup tenant for that building should that deal not go through. The other building in Cleveland,
Speaker Change: 1350 Moore Road. The tenant was current as a Q2. However, it became clear that the business was not going to be viable going forward, and we started the eviction process.
Speaker Change: This all happened very quickly. The tenant left a bunch of equipment and inventory behind that had to be cleared out, which cost us approximately $500,000 to clear out.
Speaker Change: We had a replacement tenant that was executed and is currently in dispute due to the prior tenant interference.
Speaker Change: that we still need to resolve. We are pursuing legal action against the prior tenant and trying to rectify the situation with a new one. We are also pursuing new prospects that we have lined up for next year should our current lease not be rectified.
and that we do have a specific prospect in mind.
Speaker Change: on vacancy that is really, it's not a bunch of new vacancy. There's St. Louis property that we've talked about all year just went vacant in July. And there was the Chicago property that's been vacant.
We're not we're
Speaker Change: Thanks for the clarification. Thinking about some of these tenant issues, I know that it appears that they weren't exactly things that were on your watch list.
Yeah, yes.
We were constantly doing that in this case.
I think we move swiftly to eliminate a long protracted
Speaker Change: We've been on this for seven years about this, right? We've built a vertically integrated platform.
Speaker Change: We manage about 75% of our own properties in-house. We engage with our tenants on a daily basis. This was something that came up very swift. It's not a portfolio-wide issue. And as Jim alluded to, we're backfilling both of these spaces very quickly.
Okay. Jeff, anything you could share about the Cincinnati portfolio?
About 40 million dollars.
Jeff Witherell: It's a multi-tenant. I think it's going to come in at a pretty good yield. I think we're going to like the yield on it. And it's got the growth that we're looking for, similar to Memphis.
Speaker Change: That's probably about it. We are under contract. I was going to say, is that going to close prior to year-end or do you anticipate it right around? I believe it will close before year-end.
Speaker Change: Okay, and then maybe just provide some perspective on I think what you said about a billion dollar pipeline 11 million square feet was that
Speaker Change: Is it one-off? Is it portfolios? And then to the extent, you know, obviously you've got about...
Speaker Change: If we net out the $40 million purchase, you've got about $450 million or so of dry powder from the recent transaction that's closing. Is there potential to grow Sixth Street as well to maybe unlock some additional growth?
Speaker Change: Yes, to all that. It is, it's certainly, there's three portfolios in there. Again, I don't know where these go. I mean, we're actively negotiating, so we'll see.
Speaker Change: One portfolio would be on balance sheet. We have another one that would work as a JV. And that's mostly a geographic concentration, as well as...
Speaker Change: If it's a value-add component that we don't want to bring on balance sheet, the same reasons we've done JVs in the past, right? So we have that identified. There's a lot more one-off deals that are popping up in our markets. And then just small portfolios, you know, $15 million to $20 million portfolios. So it runs the gamut.
Speaker Change: Again, we look for some good starting yields, but we're also looking for growth.
Speaker Change: As I think you alluded to before, we have a couple deals in Texas we're looking at, so that would be a market that we've always wanted to get into. We'll see how that plays out. So yeah, I mean, 6th Street is there with plenty of capital. It's really just putting the deals together.
Thank you. Thank you.
Speaker Change: The next question comes from Rich Anderson with Whitebush. Please go ahead.
Speaker Change: had some sort of new system that was going to improve everybody's online ordering, but it didn't really pan out. Everybody used different sources, and we kept them. I mean, they were in there for a couple years, and they were always current on rent, and we had
Speaker Change: We made sure that all of our investment, our commissions and tenant improvements were paid back. We had a letter of credit that covered all that.
Speaker Change: refurbishing windmill furniture. So it's a business that is a viable plan but it just is in its infancy and they were they were current for a couple years as well.
So I would say, moving forward, we would definitely...
without
you know, a larger backing, financial support.
Okay.
Speaker Change: I guess I never thought of sitting on a windmill, I guess now I am thinking about it. The second question is the marker on the Chicago...
Speaker Change: Would you agree, not to be cynic here, but would you agree that that number was influenced by the fact that there was also the preferred and there was also the warrants, like in the absence of those other elements of the transaction, would that 6-2 really have been 6-2 or would have been something greater?
Well, Rich, this is Jeff. I think it's, I mean,
Speaker Change: Sixth Street wouldn't have done one without the other, right? I mean, I think this is a transformative transaction. They underwrote the entire company, they physically looked at over 75% of our assets, so they're backing Plymouth, if you will.
Speaker Change: But as far as the portfolio is concerned, and this is where I'll go back to this and continue to pound the table as I've done for the last six months. There have been a number of trades out there of like-kind properties to Plymouth portfolios.
Speaker Change: of anywhere from 5 million square feet to 14 million square feet that have traded between six and six-and-a-half caps.
That's the marker.
Speaker Change: So, again, we have 35 million square feet of property, at a great basis.
Speaker Change: You know a great NAV calc based on those comps I mean we're in the market every day looking at portfolios And we're getting outbid because people are paying you know six six and a quarter caps for the stuff
So, I stand by that.
This tenant was on the watch list. We were working.
Speaker Change: closely with them to potentially recapitalize their business and as a contingency plan
Speaker Change: the lease up, and now there is some legal contention, but ultimately that will be sorted out here in the near future. So, I don't want the takeaway to be that we haven't been
Speaker Change: I think what we were surprised by was the velocity of change.
Speaker Change: But to Jim's point, we've moved quickly to vacate a tenant that wasn't going to pay rent.
Speaker Change: sourced, identified, and prepared the space to accommodate a new tenant at a substantially improved rental rate.
Speaker Change: You mentioned NOI next year. I don't think you're going to get guidance, but there's a lot of movement here, right? You have Chicago, you have Cleveland, Memphis, the joint venture.
Speaker Change: and St. Louis of course. When you net all that up, is there growth next year from the company? Or do you think that you've got to work some things out?
Speaker Change: and sort of TBD that maybe the real number to look at would be the year following when everything is sort of...
you know, addressed.
Speaker Change: No, I do believe that there is significant growth ahead. You know, we will, I don't know if we'll get into it if I'm going to ask this question, but like in St. Louis, you know, we ran through a whole, I think we ran through over 10 prospects.
We now have another group of prospects in there.
Speaker Change: I mean, I think if you look at the overall national vacancy rate, it's at 6.4 percent. Long-term average is 7. You know, all the brokerages are telling us that, you know, they feel that 2025, there's going to be an uptick.
Speaker Change: You know construction Construction, I think we're delivering about 300 million square feet this year. That's the lowest since 2018 so
Speaker Change: You know there were still 96 million square feet of absorption so far year-to-date probably going to break a hundred million
Speaker Change: So, there's still good things happening in industrial, and if you go to Memphis, we have a lot of opportunity to mark the market. I think we did tell people, but I'll reiterate it, that we started that out at an eight yield. Over the next two to three years, that probably gets us to a ten yield.
Speaker Change: I think the Cincinnati portfolio is going to provide similar metrics. So I feel really confident that we get St. Louis leased up.
Speaker Change: As we've mentioned, these two properties in Cleveland have prospects there that we're working on. So I feel really confident that we're gonna get some pretty good growth next year.
Speaker Change: I agree it's just a matter of timing right you get something leased up but doesn't necessarily cash flow immediately is the main point that I'm thinking about and just in cadence between 25 and 26
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Speaker Change: The next question comes from John Kim with BMO Capital Markets. Please go ahead.
Speaker Change: Thank you. On your Memphis acquisition, you mentioned Acredo Health is leaving some of their space by year-end. Was that known previously? In the last call, you mentioned a 70% tenant retention rate on the portfolio.
the diligence on that.
Speaker Change: as we speak, and then there's another 33,000 square feet, again, previously occupied by Credo Health. It has a higher office finish. It's an office-like building. We're likely to divest that. In fact, that is currently under contract.
Speaker Change: Okay, and then communication test design, they renewed or extended for a year, which is what you indicated. What are the chances that they extend past that year and would that be at market rents or is there a prearranged rate?
Speaker Change: There's not a pre-arranged rate. Obviously, it's a large space, so it would be at market, or it's like discount the market because they're taking up a lot of space. But their contract, the reason why they wanted a one-year deal was because their contract has a one-year out on it.
DirecTV, I believe, and...
Speaker Change: And as soon as that extension date goes by, they will extend.
Speaker Change: that contract didn't extend. There's two buildings there, it's not one building. They would always need one of the two buildings so they would extend one of them, not the other one. So it's not likely that they're going to move out.
Speaker Change: In your prepared commentary, there was the mention of trinitory vacancy.
Speaker Change: 487,000 square feet. Some of that was going to, it sounds like a start into 2025, but then there was wording about executing leases on 70% of that space. So I'm not really sure if those.
Speaker Change: There were some leases that we expected to start in Q4, start generating cash in Q4, that likely are going to start.
Speaker Change: The 70% reference, John, was for leases executed but not commenced.
Speaker Change: We'll see contribution from 70% of that that transitory vacancy in early Q1.
Oh, so when you say executed, that means...
occupancy
Speaker Change: No, Executed Lease, they haven't taken occupancy nor has rent commenced as of yet.
We have a lease agreement that is drafted and signed.
Speaker Change: And then on your pursuit pipeline, I think the first time you used that wording of 11 million square feet.
That's a tough question, John.
Speaker Change: We're so volatile when it comes to acquisitions and capital that we can't say 10% closure rate. And if it's on the pipeline, it's really something that we could execute on, right? So this is not a product in California or somewhere like that. This is a product that's in our markets.
Speaker Change: I don't have a great answer for you to say that, but I will say that, I mean, we're actively negotiating, you know, over $300 million of acquisitions as we sit here today with LOIs.
Speaker Change: Yeah, John, I think the way to look at that is that that pursuit pipeline is a subset of the larger pipeline. And so there is a higher kind of confidence level around execution. But to Jeff's point, that's a difficult thing to specifically handicap.
Speaker Change: Yeah, because I mean last quarter it was less than a million square feet, now it's 11. It's a pretty big jump, so I'm just wondering if...
Well, I mean...
Speaker Change: Well, I mean, we closed a six-feet transaction, right, which you never know a deal like that's going to close until you get to the table and sign the docs, which we did.
Speaker Change: And so with that capital, you know, we now can put LOIs out and stuff like that. So, you know, capital is always the question. If you have it, you can be aggressive. And if you don't...
Speaker Change: You can't be. So that's the catalyst. The six-street capital is the catalyst for us to have a much bigger pipeline that's actionable, not just to talk about it.
Thank you. Thank you.
Speaker Change: The next question comes from Todd Thomas with QBank Capital Markets. Please go ahead.
Speaker Change: Good morning. I wanted to ask about the NOI bridge or the FFO bridge that was provided in the prepared commentary, which was really helpful. Thank you for that. Going back to Rich's question about earnings or NOI growth going forward, maybe just to answer that,
to confirm around the fourth quarter.
Speaker Change: It looks like the $0.03 NOI shortfall, that's the piece that's not recurring, so your 4Q implied guidance is $0.48 to mid-point, $0.47 at the lower bound. Is that right, and is that how we should think about the exit rate into 2025, or when we think about...
Speaker Change: No, I think your interpretation of the articulation of that bridge is accurate. You know, I think Jim mentioned...
Speaker Change: We did have some one-time impacts, the most meaningful of which was a $500,000 cleanup fee essentially related to the tenancy at $1350,000 more.
Speaker Change: Got it. So, so that includes now everything that's been announced everything, you know, and then some of the lease up some of the commencements.
Okay.
Speaker Change: And then I just had a question about leasing in general and sort of the leasing pipeline and some of the discussions that you're having with tenants. You know, we've heard about longer decision making timeframes.
Speaker Change: I'm just curious to get your take, you know, with the election being behind us, does that...
Speaker Change: improve leasing activity at all at the margin or is there you know still a bit of uncertainty or maybe more uncertainty and hesitation around you know maybe certain policies that might you know prohibit leasing activity from from picking up a bit what's what's your thought process there what are you hearing?
Speaker Change: So, Jim will jump in here in a minute, Todd, but this is Jeff.
Speaker Change: You know I think you know we were together what four or five weeks ago, and you know after that
Speaker Change: You know, the velocity of leasing really, really slowed down. Again, whether it's the election or whatever, but I think we were out four or five weeks ago talking to investors. And you know, we actually felt the pickup in activity, but the last three or four weeks, there's been a real slowdown. Personally, I would think that is leading up to the election and
Speaker Change: possible rate cut today, and so on and so forth. Jim, you want to add some color? Yeah, specifically on St. Louis, we had a couple of tenants that said they weren't going to make a decision until after the election.
Speaker Change: Hopefully they get back to us in the very near future.
Okay. Thank you.
Speaker Change: And now you have different prospects. Can you give any color on how that process is evolving and the new lease proposals?
Thank you. Bye.
Speaker Change: There are four leasing transactions that are nearing completion that would effectively take half of the space off the market. These are deals for various reasons that are not ideal for us.
Speaker Change: Pricing was low and there's some hazard issues on what's being stored. So we're not expecting to close on these. However, we're still in the RFP process on those.
Speaker Change: One of these is only 326,000 square feet, so we are one of two buildings that can afford to use over 500,000 square feet. So what I'm getting at is we're really the only game in the market and our building is new and that building is 30 years old.
Speaker Change: With all this pickup in the market and activity, I'm really confident that we're going to land a prospect very soon.
Speaker Change: So specifically in Q2, our rent growth was a little lower and partially to do because we had two renewals
Speaker Change: In Indianapolis on large tenants that took up additional space because they took on additional space the rent increase wasn't quite as high So they drove it down from where we were at, you know, normally like 18 percent down to like the 12
Speaker Change: And in this case, we're working with tenants to expand and of course give them a little rate discount if they do.
Great, thank you for taking my questions.
Thank you.
Speaker Change: The next question comes from Anthony Howe with Truist Securities. Please go ahead. Good morning, guys.
Speaker Change: Can you guys provide any progress update on the remaining space at Ledy in St. Louis and the 16801 Exchange in Chicago? And what's the interest level for these spaces right now?
Speaker Change: Yeah, we're really confident that the existing tenant's going to expand into either all of the 40,000 square feet left at Latty or at least half.
Speaker Change: Probably by the end of the year That's our time frame and on exchange that billing has been a lot of interest But the deal hasn't come through What we're doing is we've managed to get the taxes down quite a bit
Speaker Change: during the year to our appeal process, but we're also applying for a 6B status, which requires the building to be vacant for one year, which it will be at the end of this year, and that'll get us an additional 60 percent savings on taxes and make the building much more attractive going forward.
Thank you.
Speaker Change: And then for the St. Louis building, if you guys can't find an attractive deal, at what point do you decide to redevelop it into a multi-tenant building? And what would the incremental return be?
Speaker Change: Yeah, so I mean ideally we want to not go beyond, we really want two tennis in there, one or two. We don't really want to go beyond that.
Speaker Change: It's easily divided into two, you get into three, you're going to have to put in more offices. So that's our objective, is to keep it to one or two.
at this point.
Speaker Change: Jeff Bezos, The Big Game Hunter, The Big Game Hunter, The Big Game Hunter, The Big Game Hunter,
Speaker Change: 10 10 bays or something like that. I mean, how are your doors? How how is it? sprinklered, you know where the You know the wastewater I mean all these things come into play if you have to start jackhammering concrete floors to put in pipes that cost a fortune
So, we're on that. That's something we're specialists at.
Speaker Change: And just one last question for me, for the Cleveland spaces, are you guys expecting to receive rent payments through the eviction court?
We haven't factored it in, but we are expecting to.
to get some competition.
Speaker Change: And how much would that be and would you guys like receive it like year-end or like in 2025? I would not count on that Anthony
Speaker Change: Let us work the process, but from a modeling perspective and certainly from an accounting perspective, I would expect zero return. We don't want to be talking on an open call about our legal strategies.
We're on it, this isn't our first rodeo.
The
All set?