Plymouth Industrial REIT, Inc. (NYSE:PLYM) Q3 2023 Earnings Call Transcript

Plymouth Industrial REIT, Inc. (NYSE:PLYM) Q3 2023 Earnings Call Transcript November 2, 2023

Plymouth Industrial REIT, Inc. misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $0.46.

Operator: Hello and welcome to the Plymouth Industrial REIT Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Tripp Sullivan of SCR. Please go ahead, sir.

Tripp Sullivan: Thank you. Good morning. Welcome to the Plymouth Industrial REIT conference call to review the company’s results for the third quarter of 2023. On the call today will be Jeff Witherell, Chairman and Chief Executive 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 and 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 9, 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 2, 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, potential acquisitions, dispositions 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. 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 and have made a lot of progress on 2024 expirations. Organic growth remains on track as well with a 6.8% 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 nearshoring for many years to come. We believe we continue to be in the right markets at 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. In our development program, we delivered two projects during the quarter. The first is our second building in Atlanta, which has a new lease for 72,000 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 1 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 in the new developments 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, strategic execution of the ATM program at prices close to our NAV, 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 6.7 times as of quarter end, we exceeded our year-end goal of 7 times ahead of schedule. We are on a path to further gradual de-levering in 2024. Yesterday, we also took care of our largest debt maturity with the payoff of the AIG loan. 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 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 6510 West 73rd Street, Chicago.

We 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 combine 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 and/or acquisitions and eliminates a market where we did not have any scale, another factor we’d previously identify. We will continue to evaluate buildings that, for real estate reasons, we no longer desire to hold.

For 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 and/or 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?

Jim Connolly: Thanks, Jeff. Good morning. I want to first touch on the leases we previously signed that commenced during the third quarter. 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 in the supplemental that the new leases experienced a 25.9% increase, while renewal leases experienced a 23.6% increase. We experienced a 68% renewal rate during the quarter of the leases that were renewed 9% were associated with contractual rent increases, which impact the overall renewal rate increase. Related to the development program, in Georgia we executed a five-year, 72,000 square foot lease and a 180,000 square foot facility with active tenants pursuing the balance.

In Cincinnati, we executed the five-year lease for 47,000 square feet and our 155,000 square foot facility and our close and other deals to fill the balance of the space. Both executed leases commenced during Q3, and for all the remaining 215,000 square feet of space yet 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 scheduled to expire in 2023. When we add up all the leases commencing in 2023, we will experience an aggregate increase of 20.1% 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 renewals were 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 for October occupancy is back up to 98% for the entire portfolio and 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 2024, we have already leased over 34% of the initial 2024 expirations. 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. The renewal percentage 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 markets. Consistent with nearly every quarter since the pandemic, we have collected over 99% of our rents 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.

Anthony Saladino: Thanks Jim. The third quarter saw a core FFO at $0.46 per share, driven by sequential improvement in leasing spreads, contributions from our Phase 1 developments, namely Jacksonville and Atlanta, slightly lower-than-anticipated interest expense, coupled with lower professional fees and corporate operating expenses. As Jeff mentioned, the path to sustaining sub-7 times net debt to annualized adjusted EBITDA has accelerated due to our strategic use of the ATM and an asset divestiture to redeem the Series A and repay a portion of the outstanding line 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 adjust the EBITDA at 6.7 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 payoff of the AIG Loan, our largest secured debt principal amount representing approximately 12% of our total debt outstanding. On November 1, we repaid the AIG Loan in full, which was $106.9 million after the release of lender escrows. 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 in the very near future on approximately a $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 5.4% for the quarter and 6.8% 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-year expense reconciliations. We once again affirmed core FFO 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.

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Q&A Session

Operator: Thank you very much. Our first question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas: 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 continue to get some leasing done, particularly at Fisher Park 1 and New Calhoun II?

Jim Connolly: Yes, this is Jim. In Cincinnati, we’re close with two potential candidates and expect some movement in the next couple of weeks. Multi-tenanting the building has opened up a wider range of opportunities there. In Georgia, we are very close on a lease with a food manufacturer of blended food products. We’ve been working with Georgia power to address power supply issues which are getting resolved and we expect to have a lease shortly.

Todd Thomas: Okay, and then how should we think about new starts, you know, moving forward from here? Is there anything that you’re contemplating, anything that might hit before year-end or in early 2024?

Jeff Witherell: So Todd, this is Jeff. So as in the prepared remarks, our Phase I development program is basically finished. We have one building under construction in Jacksonville that’s leased. That’ll be delivered early 2024. We’re not going to take on any more spec development. However, we do have in Cincinnati 200,000 square feet. We are talking to a potential build-to-suit. So those would be the only things that we would ever start, you know, probably in the next 12 to 14 months, we’re going to strictly be looking at build-to-suites. So we have four or five sites where we could build on, and so that’s our focus.

Todd Thomas: Okay. And then, Anthony, you commented on the balance sheet and overall leverage, which came in quite a bit, as you mentioned. So you’re, you know, below the 7 times threshold. 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 in the development pipeline? Thanks, Todd.

Anthony Saladino: Yes. Thanks, Todd. We’ve said early on our target is to be sustaining between 5 times and 7 times. We have made significant inroads and, as you mentioned, came in under our 7 times target. There is certainly an opportunity as development stabilizes in ‘24 for another half turn down. So our next kind of target, if you will, would be sustaining around 6.5 times and maybe just under that.

Operator: The next question comes from Nick Thillman with Baird. Please go ahead.

Nick Thillman: Hey, good morning, guys. Maybe a question for Jeff or Jim. Just on 2024 leasing, you’ve gotten 2.2 million square feet done. Just some of the larger known expirations, FedEx, communication, test design, are any of those addressed in what you’ve done so far or maybe get a color on those two individual leases?

Jim Connolly: Yes, I mean, the larger space that’s coming up next year, of course, FedEx, which has a renewal notification date of 1/31 of next year. We’ve begun our engagement with them on potential renewal and we expect to hear a different advance after the end of the year. We’re working with feasible supply, which is [Indiscernible], that building is quite full. The operations are strong there. We expect to have a renewal in that space, that’s 330,000 square feet. Silver Line is a known move out and we’re working on marketing that space. We’ve got six to eight potential prospects of various sizes and we’re trying to see how we fit them in the space. Also the neighboring tenant has approached us about extending their existing lease and potentially expanding into some of that space as well. And then one other known vacate is the [Indiscernible] building in St. Louis which is 140,000 square feet. We expect to have a transaction on that early in Q1.