Plymouth Industrial REIT Inc (PLYM) 2024 Q3 法說會逐字稿

Good morning and welcome to the Plymouth Industrial REIT conference call to review the company's results for the third quarter of 2024. I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to the Plymouth Industrial Conference call to review the company's results for the third quarter of 2024. Yesterday afternoon, we issued our earnings release, posted a copy of our prepared commentary and a supplemental deck on the quarterly results section of our Invest Relations page. In addition to these earnings documents, a copy of our 10-Q when filed can be found on the sec filings page of the IR site. 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.

We will reference this information in our remarks. With me today is 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. I would like to point everyone to our forward-looking statements on page 1 of our supplemental presentation and encourage you to read them carefully. They apply to statements made in this call, our press release, our prepared commentary and in our supplemental financial information. And now I will turn the call over to Jeff Witherell.

Thanks, Tripp. Good morning and thank you for joining us today. I will hit a few highlights first and then we will go to Q&A we have 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 Sixth Street. I view this as transformative for us in several respects. Most notably, we put a valuation marker on our largest portfolio with the Chicago recap JV and sourced capital for up to $500 million in acquisitions. platform. We also significantly enhanced our borrowing capacity with this month's refinancing and upsizing of our unsecured credit facilities to $1.5 billion. With this increase in the revolver in recasting of one of the term loans, we have extended our maturities and enhanced the ability to pursue other unsecured debt.

The combination of Sixth Street and the additional borrowing capacity solves our current capital needs. Our focus for the balance of this year and throughout 2025 is on our leasing opportunities in putting the capital to work. that is what you can expect to hear from us, the next several quarters. Our earnings release in prepared commentary outlined a few tenant challenges we faced during the quarter that we did not anticipate. We are confident that we will work through these and get the spaces leased. We have 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.

We are 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 are excited about. Our pursuit pipeline is over 11 million square feet and over 1 billion in size with nearly all of the opportunities located in our existing markets. We know these markets well and we now have the capital to expand our scale. I look forward to providing more updates over the next several months on how we are progressing with the leasing and capital deployment. I would now like to turn it over to the operator for questions.

We will now begin the question-and-answer session. The first question comes from Mitch Germain with citizens JMP. Please go ahead.

Good morning. So, Jeff maybe just talks about some of the issues that arrived. I mean, I know you have them in you prepared comments. But I think last quarter, you mentioned an issue in Cleveland that was unanticipated, but it seems like, now you have some other vacancies that we realized that I guess where they unanticipated or the lease was delayed? Can you just maybe describe a little bit more detail about those different situations?

Yes, sure. Mitch. So, Jim Connolly, is here is as you know, he heads of asset management, so he's, he's got all the detail on that. So, we will let him walk you through it.

So, starting with of Cleveland. Right, we had two issues in Cleveland. One with 2100 International Parkway with a tenant. It was up to date through Q2 and rent, but abruptly laid off all its employees informed us they could not pay rent. So, we evicted them effective [930] taking legal action against them 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 but that they put that deal on hold. However, now we are really far along 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, in 1350 Moore Road, the tenant was current as of Q2. However, it became clear that the business was not going to be viable, going forward and we started the eviction process. This all happened very quickly. The tenant left a bunch of equipment and in inventory behind that had to be cleared out, which had cost us approximately $500,000 to clear up.

We had a replacement tenant that was executed and is currently in dispute due to tenant the prior tenant interference that we still need to resolve. We are pursuing legal action against the prior tenant trying to rectify the situation with the new one. We are also pursuing new prospects that have 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. I want to point out on vacancy that is really, it is not a bunch of new vacancy. There is Saint Louis property that we have talked about all year, just went vacant in July and there was the Chicago property that is been vacant, which we get into detail about a second. But if you exclude those two, we only have it is a 2.7% vacancy. So, it is really just those two leases that drove the Q3 vacancy.

Okay. Thanks for the clarification. Thinking about some of these tenant issues. I know that it appears that they were not exactly things that were on your watch list prior to identifying them, but are you spending a bit more time engaging with your clients to gain a better sense of their respective businesses to identify what other issues could arise?

Yeah. Yes. We were constantly doing that in this case. I think we moved swiftly to eliminate a long-protracted problem, and we are working with all our tenants.

Mitch, I think we have been on this for, for seven years, about this, right? we have built a vertically integrated platform. We manage about 75% of our own properties inhouse. We engage with our tenants on a daily basis. This was something that came up very swift. It is not a portfolio wide issue. And as Jim alluded to, we are, we are, we are backfilling these both of these spaces, very quickly.

Okay. Jeff, anything you could share about the Cincinnati portfolio.

Yeah, it is about $40 million. It is a multi-tenant. I think it is going to come in at a pretty good yield. I think we are going to like the yield on it, and it is got the growth that we are looking for similar to Memphis. That is probably about it. I mean, we are under contract.

I was just saying is that going to close prior to year-end or you anticipate it like right around.

I believe it will close before year end.

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. Yeah. Can you anything there that, you know? I mean, is it one off, is it portfolios and, and then to the extent, I obviously you have got about if we net out the $40 million purchase, you have got about like 450 or so of dry powder from the recent transaction that is closing. So, I mean, kind of what is their potential to grow Sixth Street as well to maybe unlock some additional growth.

Yes, to all that, it is certainly there is three portfolios in there. Again, I don't know where this go. I mean, we are actively negotiating. So, we will see one portfolio would be on balance sheet. We have another one that would work as a JV and that mostly a geographic concentration as well as if it is a value-add component that we don't want to bring on balance sheet, the same reasons we have done JV in the past, right? So, we have that identified, there is a lot more one-off deals that are popping up in our markets and then just small portfolios, $15 million to $20 million portfolios. So, it runs the gamut. Again, we look for some good starting yield, but we are also looking for growth.

And so that is the mandate. So, we are pretty excited about our existing footprint. we have got some as I think you alluded to before we have a couple of deals in Texas we are looking at. So that would be a market that we have always wanted to get into. we will see how that, how that plays out. So, yeah, I mean Sixth Street is there with plenty of capital. it is really just putting the deals together.

Thank you.

The next question comes from Rich Anderson with Wedbush. Please go ahead.

Hey, thanks. Good morning. Maybe, just to put a finer point on Mitch's question around Cleveland, you mentioned abruptly laid off employees in the case of 2,100 and business not viable in the case of 1,350 maybe, I don't know what those businesses were or maybe I don't want to know. But I am curious as to what the learning event is from this in terms of just sort of monitoring credit monitoring industries that you are exposed to. And if there is anything that you take from this, that you look throughout your portfolio and say, we have got to give something here or there, a second look and make sure that we are protected, Any kind of comment around that topic.

Yeah, I mean, obviously, both of these industries were fairly new industries. One at 2,100 was an online retailer that they 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 of years, and they were always current on rent, and 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. So, we didn't lose that in that investment when we lost on the future part of it. And the other tenant is refurbishing windmill furniture. So, it is a business that is a viable plan, but it is just in its infancy, and they were current for a couple of years as well. So, I would say moving forward, we would definitely not pursue this new type of transactions without a larger backing financial support.

Okay, I guess I never thought of sitting on a windmill. I guess, now I am thinking about. The second question is that the marker on the Chicago cap rate with Sixth Street of 6.2%. That would you agree not to be a cynic here? But would you agree that that number was influenced by the fact that there is also the preferred and there were also the warrants like in the absence of those other elements of the transaction, would that 6.2% really have been or 6.2% would have been something greater?

Well rich. This is Jeff. I think it is I mean 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 looked at, they physically looked at over 75% of our assets. So, they are backing Plymouth if you will. But as far as the portfolio is concerned and this is where I will go back to this and continue to pound the table as I have done for the last six months. There have been a number of trades out there of like kind properties to Plymouth portfolios of anywhere from 5 million square feet to 14 million square feet that have traded between six and six and a half caps.

That is the marker. So, I again, we have 35 million square feet of property at a great basis, and we are going to get all this product leased as we always do. All of us in this room have been in the business for at least 2025 years and I think when you cap our NOI next year, you are going to be right back into a great [NEV CALC] based on those comps. I mean, we are in the market every day looking at portfolios and we are getting outbid because people are paying, six, six and a quarter cap for the stuff. So, I stand by that.

And then, Rich 1 follow up to Jim's commentary with respect to 1350 more. This tenant was on the watch list. We were working closely with them to potentially recapitalize their business and as a [continuously] plan, we sourced, identified, and fully negotiated with a new tenant at a 27% positive spread to expiring rents. That is the tenant that Jim mentioned with respect to 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 to takeaway to be that we have not been acutely focused on tenant health. We have been, these tenants in particular were closely watched. I think what we were surprised by was the velocity of change. But to Jim's point, we moved quickly to vacate a tenant that wasn't going to pay rent. Sourced identified and prepared the space to accommodate a new tenant at a substantially improved rental rate.

Very good. Thanks for that. And then last question for me, you mentioned, next year, I don't think you are going to give guidance, but there is a lot of movement here, right? You have Chicago, you have Cleveland Memphis, the joint venture and Saint Louis, of course. When you net all that up, is there growth next year from the company or do you think that you got to work some things out and sort of TBD that maybe the real number to look at would be the year following when everything is sort of addressed.

No, I do believe that there is significant growth ahead. We will, I don't know if we will get into it, I ask this question, but like in Saint Louis, we ran through a whole, I think we ran through over 10 prospects. We now have another group of prospects in there. I mean, I think if you look at the overall national vacancy rate, it is at 6.4% long term average is 7%.

All the brokerages are telling us that, they feel that 2025 there is going to be an uptick. Construction, I think we are delivering about 300 million square feet this year. That is the lowest since 2018. So, there is still 96 million square feet of absorption so far year-to-date probably going to break 100 million. So, there is 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 will reiterate it that we started that out at an eight yield over the next 2 years to 3 years that probably gets us to a 10 yield.

I think the Cincinnati portfolio is going to provide similar metrics. So, I feel really confident that we get Saint Louis leased up, as we have mentioned, these two properties in Cleveland have prospects there that we are working on. So, I feel really confident that we are going to get some pretty growth next year.

I agree. It is just a matter of timing, right? You get something leased up. It doesn't necessarily cash flow immediately is the main point that I am thinking about just in cadence between 2025 and 2026. That is all I got. Thanks.

The next question comes from John Kim with BMO capital markets. Please go ahead.

Thank you. On your Memphis acquisition, you mentioned Credo Health is leaving some of their space by year end. Was that known previously? In the last call you mentioned the 70% tenant retention rate on the portfolio.

Hey, John, this is Anthony. Yeah, that square foot it was a [not-vacate]. There is about 100,000 of that was previously a call center that we were converting back to more templated industrial space. We don't know if we are going to deliver 250,000 square foot suites or 100,000 square foot building, we are going through the diligence on that as we speak. And then there is another 33,000 square feet again, previously occupied by Credo Health. it has a higher office finish. It is an office like building. We are likely to divest that in fact, that is currently under contract.

Okay. And then communication test design, they renewed or extended for a year, which is what you had indicated. What are the chances that they extend past that year? And would that be at market rents or is there a prearranged renewal rate?

There is not prearranged rate. Obviously, it is a large space so it would be at market, or it is like discount the market because they are 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 with [direct EV], I believe. And, as soon as that extension day goes by, they will extend now if for some reason, that contract didn't extend there are two buildings there. it is 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 is not likely that they are going to move out.

In your prepared commentary. There was a mention of transitory vacancy 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 and 70% of that space. So, I am not really sure two sentences tied to each other. I was wondering if you could just elaborate on that.

There were some leases that we expected to start in Q4, start generating cash in Q4 that likely are going to start in 2025.

Yes. So, the 70% reference John was for leases executed but not commenced. We will see contribution from 70% of that transitory vacancy in early Q1.

So, when you say executed, that means occupancy, not signing a lease.

No executed a lease. They haven't taken occupancy nor has rent commenced as of yet. We have a lease agreement that is drafted and signed.

And then on your pursuit pipeline, I think the first time you used that wording of 11 million square feet. How much of that do you expect to eventually close?

I mean, that is tough question, John. We really don't know. I mean we are so volatile when it comes to acquisitions and capital that we can't say 10% closure rate and if it is on the pipeline, it is 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 is in our markets. I don't have a great answer for you to say that, but I will say that I mean we are actively negotiating, over $300 million of acquisitions as we sit here today with LOI.

Yes John, I think the way to look at that is 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 is a difficult thing to, specifically handicap.

Yeah because, last quarter, it was less than a million square feet. Now it is 11, it is a pretty big jump. So, I am just wondering.

Well, I mean we close at 6 feet transaction, right. Which you never know, that is a deal like that is going to close until you get to the table and sign the documents which we did. And so, with that capital, we now can put LOIs out and stuff like that. So, capital is always the question. If you have it, you can be aggressive and if you don't, you can't be. So that is the catalyst. The sixth street capital is the catalyst for us to have a much bigger pipeline that is actionable, not just to talk about it.

Thank you.

The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Hi, thanks. 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. And sort of going back to Rich's question about earnings or NOI growth going forward maybe just to confirm around the fourth quarter, it looks like the ¢0.3 NOI shortfall. That is the piece that is not recurring. So, your four Q implied guidance is ¢0.48 to midpoint ¢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, some of the moving pieces around the Sixth Street transaction and other leasing, and so forth. Is there anything else that would weigh on FFO as we do think about, sort of the run rate into 25?

No, I think your interpretation of the articulation of that bridge is accurate. I think Jim mentioned we did have some onetime impacts the most meaningful of which was, $500,000 cleanup fee essentially related to the, the tenancy at 1,350 more.

Got it. So, that includes now everything that is been announced, everything, you know, and then some of the lease up some of the commencements and some of the capital deployment, all of that should build off of the fourth quarter FFO run rate,

correct.

Okay. And then I just had a question about leasing in general and sort of the leasing pipeline and some of the discussions that you are having with tenants, we have heard about longer decision-making time frames, and I am just curious to get your take with the election being behind us. Does that improve leasing activity at all at the margin or is there still a bit of uncertainty or maybe more uncertainty and hesitation around, maybe certain policies that might prohibit leasing activity from picking up a bit. What's your thought process there? What are you hearing?

So, Jim will jump in here in a minute, Todd, but this is Jeff. I think, we were together, what four or five weeks ago and after that the velocity of leasing really slowed down again, whether the election or whatever. But I think we were out four or five weeks ago talking to investors, and we actually felt a pickup in activity but the last three or four weeks, there has been a, there was a real slowdown. I personally would think that is leading up to the election and possible rate cut today and so on and so forth. Jim, you want to add some color.

Specifically, on in St. Louis we had a couple of tenants that said they were not going to make a decision until after the election. So, hopefully they get back to us in the very near future.

Okay. Thank you.

The next question comes from Brendan Lynch with Barclays. Please go ahead.

Great. Thank you for taking my question on the St. Louis asset Jeff, you mentioned that you have about 10 prospects and now you have different prospects. Can you give any color on how that process is evolving and to do these proposals?

Sure. St. Louis Yeah, sure. So, a little recap of the St. Louis market. So, there is approximately 3.8 million of space available with Edwards Ville Submarket, seven buildings including ours. There are four leasing transactions that are nearing completion that would effectively take half of the space of the market. These are deals for various reasons are not ideal for us.

Pricing was low and there are some hazard issues that on what's being stored. So, we are not expecting to close on these. However, we are still in the RFP process on those. However, if we don't ultimately close on one of them and leave that will leave only three buildings with space over 325,000 square feet in the market. One of these, it is only 326,000 square feet. So, there is only one of two buildings that can afford a user over 500,000 square feet. So, what I'm getting at is we are really the only game in the market and our building is new and that other is 30 years old. So, with all this pickup in the market and activity, I am really confident that we are going to land a prospect very soon.

Okay, Thank you. that is helpful. Some of your peers are also leaning more into occupancy over rate at present given the uptick in vacancy in the portfolio, can you talk about how you are trying to balance those two things as we go into 2025.

Specifically, on Q2, I know our rent growth was a little lower and partially to do because we had two renewals in Indianapolis on large tenants that took up additional space because they took on additional space. The rent increase wasn't quite as high as they drove it down. From where we were at, normally like 18% down to like the 12% to 12.2% that you see. So, really, we are factoring that into our deals. And in this case, we are working with tenants to expand and of course, give them a great discount if they do.

Great. Thank you for taking my questions.

The next question comes from Anthony [Howe] with Truist Securities. Please go ahead.

Good morning, guys. Can you guys provide me a progress update on the remaining space at [Latty], St. Louis and the 16,801 exchange in Chicago. And what's the interest level for these spaces right now?

Yeah, we are really confident that the existing tenant is going to expand into either all of the 40,000 square feet left at [Latty] or at least half, probably by the end of the year. That is our time frame and on exchange that building, there has been a lot of interest, but the deal hasn't come through. What we are doing is we have managed to get the taxes down quite a bit during the year to our appeal process. But we are also applying for a six B status which requires the building to be vacant for one year, which it will be at the end of this year and that will get us an additional 60% savings on taxes and make the building much more attractive going forward.

Then for the St. Louis building, if you guys cannot 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?

Yeah. So, I mean, ideally, we want to not go beyond, we really want two tenants in there, one or two. We don't really want to go beyond that. It is easily divided into two. You get into three, you are going to have to put in more offices. So that is our objective is to keep it to one or two at this point.

And that in that particular building.

Yeah.

Yeah, I mean, that is the case with every building Anthony, right? This is Jeff. Some buildings are conducive to multi-tenant, and some are not. So, when you have a million square feet, you don't just break it up into 10 bays or something like that. I mean, how are your doors? How, is it sprinkler, where were 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, you know, we are on that is something we are specialist at.

Okay. And just one last question for me, for the Cleveland Spaces, are you guys expecting to receive rent payments through the Eviction court?

We have not factored it in but we are expecting to get some competition.

And how much would that be? And would you guys like we see it like year-end or like in 2025?

I would not count on that, Anthony. Let us, work the process, but from a modeling perspective and certainly from an accounting perspective, I would expect zero return.

And we don't want to be talking on an open call, our legal strategies. All right, but we are on it. This is not our first rodeo all set.

This is the end of the question-and-answer session, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.