Plymouth Industrial REIT, Inc. (NYSE:PLYM) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning and welcome to the Plymouth Industrial REIT First Quarter 2023 Earnings Call. [Operator Instructions] 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.

Tripp Sullivan : Thank you. 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 Saladino, 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 4, 2023, and will not be updated subsequent to this call. During this call, certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to 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 and are subject to risks 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, core FFO, AFFO, and adjusted EBITDA. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC. I’ll now turn the call over to Jeff Witherell. Please go ahead.

Jeff Witherell : Thanks, Tripp. Good morning, everyone, and thank you for joining us today. We are 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 9.1% 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 a top priority, both within the existing portfolio and in the development program, and we are in great shape with our 2023 expirations and have a strong start on 2024 expirations. 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 20.5% increase on leases commencing over the next three quarters. That gets us to a full-year total of a 19.3% increase, knowing 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’ve brought three of the Phase 1 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’re actively leasing it. We also expanded Phase 1 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 in 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 reshoring and nearshoring 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?

Jim Connolly : Thanks, Jeff. Good morning. I want to 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 that the new leases experienced a 37.9% increase, while renewal leases experienced an 11.7% increase. We experienced a 56% renewal rate during the quarter. Of the leases that renewed, 21% were associated with the contractual rent bumps. That high percentage of renewals coming from contractual rent bumps is something I’ll come back to in a moment. In the development program, which isn’t included in these calculations, we had 236,000 square feet commencing on newly constructed industrial facility in Atlanta, Georgia.

For signed leases commencing in Q2 through Q4, we will experience an aggregate increase of 20.5% 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 1 that will commence in 2023, we will experience an aggregate increase of 19.3% on a cash basis. The lease renewal rate 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 110,000 square feet going vacant during the quarter and the inclusion of 155,000 square feet in new development space completed during the quarter.

There are a couple of points to note here about 2023 leasing to date. First, 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 expirations. We will experience an aggregate 14.4% increase on a cash basis on these rents, 5.1% for renewals, and 61.9% for new tenants. This 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. Consistent with nearly every quarter since the pandemic, 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.

Anthony Saladino : 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 9.1%. 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 7.25% to 7.75%, but consistent with the quarterly projections we used to create that range. That’s one of the main reasons we affirmed the 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 roll over 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, and it should be anticipated that we remain range-bound on our full-year G&A outlook. Interest expense continues to reflect the increase in the borrowings on our revolver associated with completing our development plan and the approximately 355 basis point increase in SOFR 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. As noted in the release, we have funded approximately 88% of the $61 million of the development program that now includes the two pre-leased Jacksonville buildings to get us to 720,000 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 in 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 and 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 7.14 times and net debt plus preferred to adjusted EBITDA at 7.53 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 carried a fixed rate or was fixed through interest rate swaps with a total weighted average cost of debt of 3.96%, 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 in operating expense escrows and $262.5 million of capacity on the revolving line of credit.

We continue to evaluate our options to address the Series A preferred earlier than anticipated and the Q4 maturity of the AIG loan with utilizing some of this liquidity and/or select dispositions and other finances. 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 developments leasing up on schedule, we affirm the 2023 guidance we issued in March. With no large move-outs in 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 is determined mainly by how quickly we get our remaining developments leased up. Combined with the continued simplification of the capital structure and 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.

Q&A Session

Operator: [Operator Instructions] Nick Thillman, Baird.

Operator: Todd Thomas, KeyBanc.

Operator: Bryan Maher, B. Riley Securities.

Operator: Mike Mueller, JPMorgan.

Operator: [Operator Instructions] Mitch Germain, JMP Securities.

Operator: There appears to be no additional questions. I’ll turn it back to Jeff Witherell for any closing remarks.

Jeff Witherell : Thank you all for joining us this morning. As always, we’re available for follow-up questions. Thanks again. Have a great day.

Operator: Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.