Indus Realty Trust Inc (INDT) 2020 Q2 法說會逐字稿

Good morning, and welcome to Griffin Industrial Realty's Second Quarter 2020 Earnings Webcast. (Operator Instructions) It is now my pleasure to turn the program over to Michael Gamzon, President and CEO of Griffin.

Good morning, and thank you for logging in to our inaugural earnings webcast. As always, we appreciate your interest in Griffin. Today, I will provide a general overview, and our CFO, Anthony Galici, will provide some details on the second quarter numbers. As with the expanded statistics in our second quarter leasing release in June, this call is an effort to provide more information to our investors.

In the same vein, I would also like to announce that we've hired Ashley Mancuso-Pizzo as our Director of IR and Capital Markets. Ashley will be joining our team later this month and brings very relevant experience, having previously led the IR and Capital Markets team at Gramercy Property Trust prior to its acquisition by Blackstone in 2018. We are looking forward to her contributions as we continue to build out our IR platform and grow the business.

Now before diving into our performance, since we'll be making forward-looking statements, we ask that you listen to the following disclaimer.

Please note that some statements during this call are forward-looking statements as defined and within the safe harbor rules under the Securities Act of 1933, the Securities Exchange Act of 1934, and Private Securities Litigation Reform Act of 1995, including statements regarding our business plans and expected timing of those plans, expected impacts of COVID-19 on our business and market expectations. Forward-looking statements in the earnings press release, along with our remarks, are made as of today, and we undertake no duty to update them whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing coronavirus pandemic and other important risk factors contained in our most recent Form 10-K and Form 10-Qs that may cause actual results to differ materially from our expectations.

Please note that our conference call today will contain financial measures such as leasing NOI and cash leasing NOI that are non-GAAP measures. You can find a reconciliation of our GAAP financial statement results to these non-GAAP financial measures in our earnings release and in our Form 10-Q that we filed yesterday, which are available on the Investor page of our website at www. griffinindustrial.com.

Thank you, Anthony. First, let me say that we hope all of you and your families are safe and well. The COVID-19 pandemic has created unprecedented challenges across our country since March this year. We remain sensitive to its ongoing impacts to our investors, our tenants and our colleagues. I would especially like to thank the Griffin team, which has shown great resilience, adaptability and dedication as they've worked through this recent operating environment. Our company has weathered the current challenges of COVID-19 fairly well so far. Throughout the pandemic, essentially all of our logistics tenants have remained in continual operation and most seem to be back to relatively normal operating levels. We have remained busy as well. During the most recent quarter, we entered into several new leases and renewals, grew our industrial leasing NOI and entered into an agreement to purchase land for development in the Lehigh Valley of Pennsylvania.

Anthony will provide more details, but we collected essentially all the rent due over the past few months. And with the somewhat improved current business environment, tenant rent payments have returned to normal. That said, we remain cognizant of the virus, especially in light of its recent growth in the Sunbelt, including Charlotte and Orlando where we have properties, and the impact of potential rebound in cases could have on our markets and tenants.

We believe our portfolio has held up well through the pandemic to date as we have modern, flexibly designed warehouses. These buildings cater to tenants generally ranging from 20,000 square feet to over 300,000 square feet, operated in a wide range of industries. Many of our tenants are national or global companies, and our facilities are critical to their or their respective customers' missions, supply chains and overall operations. The largest industries represented by our tenancy include third-party logistics providers, several of which are global organizations and whose underlying customers often are large, stable businesses. We also have exposure to the automotive sector, including aftermarket parts distribution for major automakers as well as national tire distribution firms, including a leading e-commerce provider of tires. Other major tenant industries include general industrial uses and building products.

Each of the 4 markets in which we currently have properties, Connecticut, the Lehigh Valley, Charlotte and Orlando, have several drivers of demand, including local, multi-market and regional distribution. Our facilities are well located within these markets to meet our tenants' varied needs from quick turn local delivery to traditional warehouse distribution to light manufacturing.

As noted in our second quarter leasing release, excluding our 2 recently completed spec buildings in Charlotte and our March acquisition in Orlando, our industrial warehouse portfolio is 99.7% leased. We have no material lease expirations for the balance of 2020, having previously announced the leasing of our largest expected vacancy of 200,000 square feet in the Lehigh Valley. Most of the leases completed this past quarter were expansions by existing tenants into adjacent spaces or a relocation from within our portfolio.

We have a keen focus on maintaining our properties to a high standard and establishing strong tenant relationships. We believe the reward from this is that our existing tenants choose to grow with us. As an added benefit, these transactions typically require lower leasing costs and no downtime as compared to transactions involving a new tenant.

With respect to our current vacancies, the largest is across the 2 spec buildings we completed in the Concord submarket of Charlotte during last year's fourth quarter. Concord has been one of the most active submarkets in Charlotte over the past year in terms of absorption, and we completed 2 leases fairly quickly after completion of those buildings. This left 42,000 square feet vacant in 1 building and 136,000 square feet remaining vacant in the other. The COVID-19 pandemic has halted most tenant activity for the past few months, and while leasing activity has picked up somewhat recently, the current surge of the virus in the region may further slow the lease-up of space in the future. As a result, we have pushed out our expectations for when the 2 buildings become fully stabilized.

While there are a number of available spec buildings in the Greater Charlotte market, the Concord submarket has fewer direct competitive availabilities, and we continue to believe our buildings are well designed and located to meet tenant demand.

Our other vacancy is 51,000 square feet in the 68,000 square-foot building in Orlando that we acquired in March. We are completing an extensive renovation of that vacant space as the prior tenant used the facility for a specialized manufacturing process. We expect to have this work completed by August. After studying the Orlando market and making it one of our targets for expansion, we have quickly amassed a 3-building portfolio of over 275,000 square feet, and we will continue to seek further opportunities in this market. We remain very positive on Orlando's long-term fundamentals that recognize the recent spread of COVID-19 in Florida and the region's heavy dependence on tourism and conventions can lead to softness in the near term.

While we currently do not have any material vacancy in our Lehigh Valley and Connecticut portfolios, we continue to monitor market activity and absorption. After the lull in the spring during the height of the pandemic in those regions, market activity has improved, and we believe landlords have limited availability and continue to expect rents at pre-COVID levels. We are especially pleased to note that in Connecticut, similar to other major industrial markets, there's been an uptick in activity and absorption by large credit tenants seeking delivery locations to service the sizable local population. We believe this bodes well for our properties when we have availability in that market.

Next, I would like to move on to our development pipeline, which includes a 520,000 square foot, 3-building development in the North submarket in Charlotte and a 103,000 square-foot building in the Lehigh Valley. With our currently high-value portfolio fully leased and the continued relative strong performance of that market, we intend to commence preliminary site work on the Lehigh Valley building in the near future. This work will represent less than 15% of total project costs and will position us to commence vertical construction as soon as we deem it prudent to do so. We note that this is a manageable expense and the initial site work is typically the cause of the most significant potential delays in delivering a completed building. With respect to the Charlotte development, we have not yet determined a commencement date for the site work.

Now turning to potential acquisitions. There may be some near-term headwinds in industrial warehouse demand due to weakness in the overall economy and impacts from the pandemic. We believe that the logistics sector will perform well over the medium and long term. We believe this sector will continue to benefit from the acceleration of the growth in e-commerce, optimization of supply chains and increased need for buffer inventories and redundancies. Griffin has a strong platform in place to benefit from the current favorable long-term tailwinds in the logistics sector. We remain active in looking for acquisitions of both buildings and land for development. We will continue to focus on our existing markets and select new regions with strong fundamentals and growth potential. And we will concentrate on properties that support last mile, regional and multi-market distribution within those markets.

From what we are seeing as well as reports from brokers and competitors, pricing for industrial assets and land for development has not really changed versus pre-pandemic levels given how well the sector has fared thus far. A number of acquisitions in the industrial sector have been completed over the past few months, and brokers are now actively marketing various buildings, portfolios and development sites for sale. For Griffin, while pricing of industrial assets may not have changed, we expect to continue to see opportunities as certain investors have halted or reduced their capital allocations for industrial development, industrial owners look to rebalance their portfolios and geographical exposures and owner occupiers may seek liquidity from their real estate in a tougher operating environment.

Since the end of the second quarter, we have signed an agreement to purchase land that is expected to support 150,000 square feet of industrial warehouse development in the Lehigh Valley. The Lehigh Valley remains a top-tier industrial market with continued strong fundamentals due to its advantageous location near major population centers. We believe the site we have under agreement is one of the few remaining properly zoned industrial sites within the core Lehigh Valley area. Closing on the site is subject to a number of contingencies, including the completion of our due diligence and receipt of entitlements. This opportunity adds to our development pipeline in a market that we expect to perform strongly into the future. We do not anticipate closing until the back half of 2021, and upon closing, we expect construction will take at least another 9 months. We are hopeful that we will be well beyond the impact of COVID-19 by then and that this project as well as our other projects in the development pipeline, will be delivered into a market benefiting from the industrial tailwinds I described above.

With that, I will turn it over to Anthony.

Thanks, Michael. I will provide a bit more detail on our second quarter financial results, noting that the impact of the COVID-19 pandemic on the general economy spanned most of the quarter.

Starting with rent collection, we collected essentially 100% of April rent and 99% of May and June rent. As we previously disclosed, in the first several weeks after the onset of the COVID-19 pandemic in March, Griffin received rent relief requests from tenants representing 22% of total monthly rent. Griffin has not finalized agreements with the 3 tenants whose rent relief requests remain outstanding. Based on the current discussions with these tenants, the anticipated amount of rent relief granted in total would equate to less than 1% of Griffin's total annual rent. All other requests for rent relief were either denied by Griffin or the tenants withdrew their requests. We have not received any new rent relief requests since the end of April. We continue to monitor the pandemic spread, noting its recent strengthening in 2 of our markets in the southeast and the potential for a resurgence elsewhere as well as any pressure that these changes could create for our tenants in the future.

Our industrial portfolio was 94.3% leased at the end of the second quarter. Our stabilized portfolio, which excludes the 2 spec buildings in North Carolina and our March acquisition in Orlando, was 99.7% leased. During the quarter, the most significant transaction was the expansion of an existing 3PL tenant in the Lehigh Valley from 100,000 square feet to 300,000 square feet. And in our New England Tradeport industrial park in Connecticut, a pharmaceutical company that has made a significant investment in its space expanded from 89,000 square feet to a total of 148,000 square feet.

In our second quarter leasing release, we provided additional statistics on these leases, notably that we achieved a weighted average rent growth on a straight-line basis of 21.4% and on a cash basis of 8.1%. Additionally, since the major new leases in the second quarter were expansions, the leasing cost for the new leases were relatively low at $0.89 per square foot per year. We believe that we are making good progress on our 2021 lease renewal discussions thus far, having recently signed a lease extension for 39,000 square feet in New England Tradeport that was originally scheduled to expire in February 2021. We also have a few larger leases that expire towards the end of 2021 which are not likely to be addressed until later this year or early next year.

Our industrial warehouse cash leasing NOI was $5.47 million for the second quarter, up 11.1% from last year's second quarter. Industrial warehouse cash leasing NOI benefited from the addition of the 3 acquisitions in the Orlando, Florida market, the lease-up in one of the spec building 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. Industrial warehouse cash leasing NOI was negatively impacted by a delay in the rent commencement of a lease in the Lehigh Valley due to a pandemic-related work stoppage in that state during March and April.

I will now touch briefly on our office flex portfolio. Office flex properties make up 9% of our portfolio by square footage, and we expect that percentage to continue to decrease as we grow our industrial warehouse portfolio. In addition, we previously announced our intention to sell our multi-story office buildings, which comprised 3.5% of our total square footage. After commencing an initial marketing effort, this offering was put on hold due to the COVID-19 pandemic. We are working with our broker to evaluate when to bring these buildings back to market. The percentage of our office flex portfolio had at least declined to 65.2% as of the end of the second quarter, from 71.7% at the end of the first quarter. Part of the decline results from the relocation and expansion of an office flex tenant into one of our warehouse buildings in New England Tradeport, in addition to 2 leases that expired and were not renewed. We anticipate that our office flex properties will remain challenged, especially as companies rethink their space needs as a result of the pandemic.

We reported general and administrative expenses for the 2020 second quarter of $2.4 million, up approximately $600,000 from the 2019 second quarter. Approximately $150,000 of the higher G&A expenses were attributable to noncash expenses for stock options and the company's deferred compensation plan. The balance of the increase in G&A expenses can be attributed to the legal and consulting costs associated with our intended conversion to a REIT and related business changes. We previously disclosed that we expect these costs to total approximately $1 million for the year, and we incurred approximately $400,000 of these costs in the second quarter and $570,000 in the 6-month period. It remains our intention to revert to a REIT, as previously announced, but we will continue to evaluate market conditions and our financial performance to determine whether to alter these plans.

Interest expense in the second quarter totaled $1.9 million, which is up from $1.6 million in last year's second quarter. The increase was due to higher balances on our revolvers and a net increase in mortgage debt of approximately $15.4 million. The increase in mortgage debt is related to a $15 million financing on 2 buildings in the Lehigh Valley, a portion of which was used to repay a smaller maturing mortgage of $3.2 million on one of those buildings. We also placed a $6.5 million mortgage on the first building we acquired in Orlando, which we paid $5.9 million that had been borrowed on our acquisition revolving credit line to help fund that purchase.

In March this year, out of an abundance of caution related to the COVID-19 pandemic, we drew down $10 million of the $19.5 million available under our revolving credit line with Webster Bank. We did not utilize any of these proceeds and subsequently repaid the entire amount borrowed before the end of the second quarter. We also had $4.1 million drawn on our acquisition credit line at the end of the second quarter that we used in February for a portion of the purchase price of our second Orlando building. Subsequent to the end of the second quarter, we repaid the amount outstanding on our acquisition revolver when we closed on a permanent mortgage loan of $5.1 million with an effective interest rate of 3.5% on that Orlando building. Including our recent financings, our weighted average cost of debt was approximately 4.21% as of the end of the 2020 second quarter.

Our capital expenditures for the second quarter totaled $2.5 million. Capital expenditures included $1.8 million in tenant and building improvements related to leasing, of which $1.1 million was for lease in first generation space. We also spent $0.3 million for the final construction cost payments on the 2 Charlotte spec buildings. Additionally, in the second quarter, we spent $5.7 million for the acquisition of the approximately 68,000 square-foot building in Orlando.

In terms of disposition activity, our previously announced sale of the Meadowood land to a national land preservation group for $5.4 million of net proceeds continues to progress through the approvals process with the various local land use commissions and state agencies that will fund the purchase. This sale remains subject to several contingencies, including the sponsor raising all the necessary funding, but if this transaction proceeds as planned, we expect a closing sometime in 2021.

The sale of 280 acres of undeveloped land in East Granby and Windsor is on a slower path and likely will not occur until 2022 at the earliest. As we previously indicated, the sale agreement for 27 acres of land in an -- for an industrial warehouse use was terminated as the ultimate tenant of the property put its plans on hold.

Lastly, we previously disclosed that a tenant in a 165,000 square foot industrial building in Connecticut had an option under their lease to purchase the building from us. The tenant did not exercise this purchase option, which expired on June 1, and the building remains under lease through March 2024. As of the end of the second quarter, we had approximately $23 million in liquidity comprised of $4 million of cash on hand and over $19 million available on our revolver. On top of that amount, we have an additional $15 million available on our acquisition revolver, adjusted for the previously mentioned repayment related to our Orlando acquisition. We have very limited near-term debt maturities. However, revolvers expire in September 2021 and with 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.

I also want to discuss our overall leverage metrics. As we develop most of our portfolio over time rather than through recent acquisitions, we believe that the book value of our buildings, which reflects substantial accumulative depreciation, is significantly below their market value on an aggregate basis. We also have land holdings that we also believe are worth significantly more than book value and generate little earnings. Additionally, we recognize that due to our current size, our G&A expenses comprise a much larger percentage of leasing NOI than our peers. We believe we have most of the infrastructure in place to support future growth of our portfolio and expect to leverage these expenses going forward. 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 37%, is the useful metric to evaluate our leverage.

This concludes our second quarter earnings call. Thank you for your interest.