Indus Realty Trust Inc (INDT) 2020 Q3 法說會逐字稿

Good morning, and welcome to Griffin Industrial Realty's Third Quarter 2020 Earnings Webcast. (Operator Instructions) It is now my pleasure to turn the program over to Ashley Pizzo, Director of Investor Relations and Capital Markets at Griffin.

Thank you, and good morning, everyone. Welcome to our third quarter 2020 earnings webcast. In addition to regularly available earnings materials, Griffin has also published a new supplemental presentation this quarter, which is available on our website at griffinindustrial.com under the Investors tab.

I would also like to mention that this conference call will contain forward-looking statements under federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates and projections about the market and the industry in which Griffin operates as well as management's beliefs and assumptions.

Forward-looking statements may include expectations around shareholder value creation, business and growth plans, timing of those plans, impacts of external factors on our business and market expectations, and expectations with respect to developments, acquisitions and dispositions, occupancy levels and the value of our land holdings. These statements are not guarantees of performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the risks listed in our most recent 10-K and 10-Q filings.

Additionally, our third quarter results press release and supplemental presentation contain additional financial measures such as leasing NOI, FFO, core FFO, cash core FFO, EBITDA for real estate and adjusted EBITDA that are non-GAAP financial measures. And in accordance with Regulation G and Item 10E of Regulation S-K, we have provided a reconciliation to those measures in our published materials, which are available on the investor page of our website at griffinindustrial.com.

This morning, we'll hear from Michael Gamzon, our CEO, who will cover recent activity, market conditions and updates on the development and leasing pipeline. We will also hear from Anthony Galici, our CFO, who will cover the third quarter results in detail.

With that, I'll turn the call over to Michael. Michael, will you please begin?

Thank you, Ashley. Good morning, and thank you all for your continued interest in Griffin. As we close in on the eighth month of the COVID-19 pandemic in the United States, we hope that you and your families remain safe and well. We recognize that the effects of the pandemic are still far from over and remain sensitive to its impacts on our investors, tenants and colleagues. While the industrial sector has remained resilient thus far, and we have experienced strong occupancy and rent collection from our industrial tenants, we remain vigilant, especially with respect to the virus' impact on the markets in which we operate.

Through this period, we've continued to push forward with our business plan. Over the last year, we have prepared the company for future growth, including the appointment of Gordon DuGan, the former CEO of Gramercy Property Trust, to the role of Chairman; announced intention to elect REIT status beginning in 2021; and increased financial disclosures, including the supplemental earnings materials released yesterday evening.

Additionally, we plan to increase our investor outreach. And to that end, we will host a Virtual Investor Day on November 11 and plan to participate in the upcoming NAREIT virtual conference on November 17 through the 19. We intend to use these events to dive further into Griffin's strategy and track record as well as to discuss steps taken and planned to accelerate growth and increase shareholder value. Please feel free to contact Ashley with any questions about the events or for more details on how to participate.

Now on to what we've been up to recently. Perhaps the most newsworthy event this quarter was the equity private placement and warrant issuance that we closed at the end of August, raising a total of $27.2 million in proceeds. This transaction represents the first time that Griffin has accessed external equity capital in our 23-year history as a public company.

The transaction allowed us to issue common equity at a price close to the then trading levels, the possibility of raising additional equity at a significant premium down the road. We see the equity raise as another important step on our path to become a leading logistics real estate company. It also provides Griffin with a new partner, Cambiar Management, who shares our vision for growth and plans for shareholder value creation.

We intend to use the majority of the proceeds for acquisitions that will help us grow our portfolio of modern, flexibly designed logistics properties. We will continue to target buildings and land for development to support buildings of between 75,000 and 400,000 square feet. We will focus on select markets with growing economies and population centers that are supply-constrained and that can service end uses from local delivery all the way up to national distribution.

Our current development pipeline reflects just that. Our existing portfolio in the Lehigh Valley is essentially 100% leased and we are eager to add to our holdings in that market. We have just begun construction on a 103,000 square-foot building in the Lehigh Valley, which we expect to complete by the third calendar quarter of next year. We also are pleased to provide an update on the land in the Lehigh Valley we discussed last quarter.

We have placed an adjacent land parcel under agreement, which, when combined with the original parcel, will support the development of an approximately 210,000 square-foot warehouse versus our original plan for a 150,000 square feet.

The Lehigh Valley remains a top-tier supply-constrained industrial market with a difficult entitlement process, but it is a process we are familiar with through our history of developing there since 2012. We are excited to have this well-located property within the core Lehigh Valley area in our pipeline.

We also have ready for development of 520,000 square-foot, 3-building industrial park in the North submarket of Charlotte, which is one of the strongest submarkets in that region with limited available development sites.

As we continue to evaluate the current market and potential changes in demand, before we commence construction on this land, we are reviewing alternative site plans, including one that would include 2 larger buildings rather than 3 slightly smaller buildings.

Charlotte remains a dynamic logistics market with strong economic and population growth. We are very bullish on the long-term trends in the region. Our existing development project in Charlotte is located in the Concord submarket which, as we mentioned last quarter, have been one of the most active submarkets in Charlotte over the past 18 months in terms of absorption. But we believe that the COVID-19 pandemic and progression of the virus in the Sunbelt region slowed the lease-up of remaining vacant space over the past several months. We note that leasing inquiries have picked up recently in the investment activity for land for development and acquisition of completed buildings remain strong in the Charlotte market.

We also are excited for our first potential development project in Orlando. This past July, we placed land under agreement that is expected to support the development of 2 buildings, totaling 195,000 square feet, located just west of the Orlando International Airport. We toured this site last year around this time, but another developer tied up the land ahead of us. Given the changing market conditions as a result of the COVID-19 pandemic, the capital source for the other buyer dried up during the spring. Upon learning of this issue, we quickly acted and reengaged with the seller and reached an agreement. The land purchase price is $5.25 million subject to the completion of our diligence and required development approvals.

The development pipeline in the Lehigh Valley, Charlotte and Orlando that I just described totals over 1 million square feet or 24% increase in square footage from where our portfolio stands today. The total development budget for these projects is approximately $89 million, and, once completed, will further diversify our current geographic concentrations.

We continue to seek acquisitions of both existing buildings and land for development in our targeted markets. Given strong sector tailwinds, pricing and demand for industrial assets in many markets is equal to or higher than pre-pandemic levels. Market remains very competitive.

A significant amount of the recent investment sales activity relates to large multi-regional portfolios, those larger than 1 million square feet across multiple markets or relate to recently completed specialized e-commerce facilities with long-term leases. These offerings are not fit for us at the moment, but we will continue to seek opportunities where we can execute creatively and add value. We have kept our ear to the ground, and I'll refer back to the Orlando land deal we tied up during a period of uncertainty this past spring as an example of our efforts to find opportunities.

The last update I'll touch on before passing it over to Anthony is around dispositions. Last March, we announced our intention to sell our 2 multi-story office properties, 5 and 7 Waterside Crossing, which we then almost immediately had to put on hold because of the COVID-19 pandemic. I'm pleased to report that we now have those 2 buildings under agreement for sale for $6.25 million.

In addition, we have another agreement in place to sell 55 Griffin Road South, a fully vacant office/flex building at a price of $1.4 million. Both sales are subject to customary closing conditions and the satisfactory completion of due diligence. The 3 properties to be sold represent 47% of Griffin's total office square footage or approximately 201,000 square feet and are currently approximately 42% leased. After the successful closing of these 3 dispositions, Griffin's remaining office/flex portfolio will contain only approximately 232,000 square feet and will be 84.5% leased. Anthony will touch on some other disposition activity in his remarks.

In conclusion, we believe Griffin is well positioned to benefit from the tailwinds in the logistics sector. We have a relatively young and modern portfolio of buildings located in strongly performing markets. As our rent collection data has shown, we have a stable tenant base. I encourage you to review the additional information and disclosures on our tenancy and on our overall company, the supplement we issued, along with the earnings release yesterday evening.

With that, I'll turn it over to Anthony.

Thanks, Michael. I will now provide a bit more detail on our third quarter financial results. Starting with rent collection, despite COVID-19's challenges, essentially all of our logistics tenants are at normal operating levels and rent payments have remained strong. Griffin collected 99.9% of rents in each of June, July and August for this quarter, inclusive of rent relief agreements.

The only new piece of news related to rent collection and deferring request is tied to 1 tenant that leases 59,000 square feet in an industrial/warehouse building in Connecticut. Subsequent to quarter end, this tenant requested rent relief under its lease that expires at the end of this calendar year. That tenant has paid or rent through September. Lease for 59,000 square feet will not be renewed as we have been previously entered into a lease agreement with the adjoining tenant in the same building, whereby the adjoining tenant will expand into that space after December 31, 2020. Griffin has not determined if it will grant any relief to the tenant under the expiring lease.

Our industrial/warehouse portfolio was 94.3% leased at the end of the third quarter. Our stabilized portfolio, which excludes the 2 spec buildings in North Carolina and our March acquisition in Orlando was 99.7% leased. Both measures remained unchanged from the prior quarter.

Michael already touched on the Charlotte market leasing environment, so I'll mention Orlando, where our only other significant industrial vacancy exists. We recently completed renovating the 52,000 square-foot vacant space in the building that we purchased in the second quarter. While the Orlando economy, which is reliant on tourism and hospitality, has been impacted by the COVID-19 pandemic, market absorption there has been solid and we are encouraged by recent tenant interest in our available space.

In terms of leasing activity this past quarter, we signed 3 renewals, totaling approximately 83,000 square feet, with positive lease trends on both a straight-line and cash basis at 16.5% and 3.6%, respectively. As we've mentioned in previous calls, we are continuing to make progress on our 2021 leasing role. Of the 747,660 square feet under leases that's scheduled to expire in 2021, all but 1 lease of 108,495 square feet, which expires on November 30, 2021, either have lease renewals pending or are in late-stage renewal discussions. Our supplement has additional disclosures on our tenancy.

Our industrial/warehouse cash leasing NOI was $5.5 million for the third quarter, up 9.3% from last year's third quarter. Industrial/warehouse cash leasing NOI benefited from the addition of the 3 acquisitions in the Orlando, Florida market, the lease-up of one of the buildings in North Carolina, and to a lesser extent, improved occupancy in the existing portfolio, notably the lease-up of Griffin's most recently completed building in the Lehigh Valley and increases in rental rates. These benefits were partially offset with free rent periods from new and renewed leases completed earlier this year, which impacted cash leasing NOI by about $350,000.

Our office/flex properties total approximately 433,000 square feet and make up 9% of our portfolio by square footage. With the successful close of the dispositions in the pipeline that Michael mentioned earlier, our remaining office footprint will be cut almost in half, down to approximately 232,000 square feet and will represent 5% of our current square footage. We expect that percentage to continue to decrease as we grow our industrial/warehouse portfolio.

Our office portfolio was 64.7% leased as of the end of the third quarter. But excluding the properties under agreement for sale, the office/flex portfolio would be 84.5% leased.

We anticipate that occupancy in the office/flex properties will remain challenged, especially as companies continue to rethink their space needs and delay making any long-term commitments as a result of the pandemic.

We reported general and administrative expenses for the 2020 third quarter of $2.3 million, up $622,000 from the 2019 third quarter. The 9-month period general and administrative expenses of $6.8 million were up approximately $1.2 million from the 2019 9-month period.

The increase in G&A expenses principally reflects increases in legal and consulting fees associated with Griffin's efforts to pursue conversion to REIT and the strategic growth initiatives, an increase in expenses related to Griffin's nonqualified deferred compensation plan, higher stock option expenses and higher public company expenses related to various corporate matters, including the increase in the size of our Board of Directors. I also refer you to Page 12 of our supplement, where we have provided additional details on our G&A expense.

Year-to-date through August, we have incurred approximately $751,000 in costs related to our conversion to a REIT and other strategic growth initiatives. As previously announced, it remains our intention to elect REIT status for 2021.

Our income statement this period also reflects a new expense, change in fair value of financial instruments of $400,000 for the 2020 third quarter and 9-month period. This expense reflects changes in the fair value of the warrant and contingent value rights that were issued as part of the private placement that was completed in August. There are also liabilities associated with the warrant and contingent value rights recorded on the balance sheet as they are being classified as derivative financial instruments under ASC 815-10. It's worth noting that although the fair value of the warrant liability is reported at $5.4 million as of August 31, 2020, the maximum amount that Griffin would be required to pay if the warrant were to be settled in cash is $2 million.

As we intend to become a REIT, effective at the start of 2021, we wanted to transition to our additional metrics that REITs typically report. In our supplemental presentation, we calculated non-GAAP measures such as EBITDA for real estate, adjusted EBITDA, FFO, core FFO and cash core FFO. I'd point you to the Appendix section of our supplemental presentation for our definition of these metrics. And reconciliations of these metrics to the appropriate U.S. GAAP amounts will be found on Slides 7 through 9 of the supplement.

The metrics that I would like to focus on are FFO and core FFO. FFO, which we have defined consistent with NAREIT FFO plus the add-back of income taxes, was $2.5 million and $7.1 million for the 2020 third quarter and 2020 9-month period versus $3 million and $7.9 million in the respective prior year periods. The decreases reflect G&A expenses and the impact of the change in fair value of our warrants, both of which I discussed previously, as well as higher interest expense related to an increase in mortgage debt which more than offset the increase in leasing NOI.

Adjusting for the change in fair value of financial instruments as well as nonrecurring G&A related to our efforts to pursue our REIT conversion and strategic growth initiatives, our core FFO was essentially flat at $3 million for the 2020 third quarter and up approximately $492,000 to $8.3 million for the 2020 9-month period versus the 2019 9-month period. Similar to FFO, core FFO was impacted by the higher G&A expenses, mostly related to noncash compensation expense and the higher interest expense previously noted.

Our capital expenditures for the third quarter totaled $3.9 million and consisted of $0.9 million for new building construction and development of -- and infrastructure costs, $0.8 million in industrial first generation tenant and building improvements related to leasing and $2.1 million in industrial second-generation tenant and building improvements related to leasing. The first generation tenant and building improvements were driven by recent leasing at 6975 Ambassador Drive in the Lehigh Valley and 160 International Drive in Charlotte. Second-generation tenant and building improvements were principally driven by over $1 million spent in the third quarter related to a newly signed 10-year lease in New England Tradeport.

At the end of the third quarter, we had $62.3 million in liquidity, comprised of $27.8 million of cash on hand, largely from our private placement transaction, which closed on August 24, and $34.5 million available on our 2 revolving credit facilities.

We have very limited near-term debt maturities. Our revolvers expire in September of 2021 and we have the option to extend each of them for an additional year. The only other debt maturity prior to 2025 consists of an approximately $4.1 million mortgage on our 2 multi-story office buildings, which are under agreement for sale, as previously mentioned.

I also want to discuss our overall leverage metrics. As we develop most of our portfolio over time, rather than through recent acquisitions, believe that the book value of our buildings, which reflect substantial accumulated depreciation, significantly below their market value on an aggregate basis. We also have land holdings that we believe are worth significantly more than book value and generate little earnings. I refer you to Page 30 of this quarter's supplement for details on our undeveloped land holdings.

Additionally, we recognize that due to our current size, our G&A expenses comprise a much larger percentage of leasing NOI than our peers. The combination of these factors impact our book value and income-based leverage metrics. We believe that debt to enterprise value, which currently stands at approximately 35%, is a useful metric to evaluate our leverage. For additional leverage metrics as well as a complete schedule of our debt, I point you to Slides 23 through 25 in this quarter's supplemental presentation.

Summary. We believe we have most of the infrastructure in place to support the future growth of our portfolio and expect to leverage these expenses going forward.

Lastly, I'll touch on some updates regarding our land dispositions. The Meadowood land sale to a land conservation organization continues to progress through various local approvals and it is expected to close in the second half of 2021. We also have listed out a few additional land sites under agreement for sale on Page 30 of our Q3 supplement. The most notable of which consists of 280 acres that are under an option agreement to a solar developer for a minimum purchase price of $6.0 million subject to contingencies. Given the lengthy qualification and approvals process to ready the site for solar development, we would not expect this transaction to close until 2022.

This concludes our third quarter earnings call. We look forward to having you join our Virtual Investor Day on November 11. Thank you for your interest.