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spk04: Good morning and welcome to Indus Realty Trust 2021 First Quarter Earnings Conference Call. This call will be followed by a question and answer session. May you add yourself into the queue for questions during any time over the course of the call by dialing star then one on your keypad. It is now my pleasure to turn the program over to Ms. Ashley Pizzo, Director of Investor Relations and Capital Markets of Indus. Please go ahead.
spk07: Thank you and good morning, everyone. Welcome to our first quarter 2021 earnings call. In addition to regularly available earnings materials, Indus has also published a supplemental presentation, which is available on our website at www.indusrt.com under the Investors tab. I would also like to mention that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections, as well as management's beliefs and assumptions. Forward-looking 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 filing for the fiscal year ending November 30, 2020. Additionally, our fourth quarter results press release and supplemental presentation contain additional financial measures such as NOI, FFO, and EBITDA for real estate that are non-GAAP financial measures. And in accordance with Regulation G and Item 10E of Regulation SK, we have provided a reconciliation to those measures. This morning, we'll hear from Michael Gamson, our CEO, who will cover recent activity, market conditions, and updates in our pipeline. We will also hear from Anthony Gallici, our CFO, who will cover the first quarter results in detail. After the prepared remarks, we'll be opening it up to your questions. With that, I'll turn the call over to Michael. Michael, will you please begin?
spk03: Yes. Thank you, Ashley. Good morning and thank you all for your continued interest in Indus. I hope you and your families are safe and well. And before we discuss the business, I did want to thank the team at Indus whose efforts have been instrumental to our success over the past year and towards the continued transformation of our company. We are fortunate to operate in a sector that remained resilient throughout the pandemic and has experienced an acceleration in demand. Specifically, the industrial market is characterized by robust leasing velocity, strong rent growth, and significantly increasing property values as cap rates drop and continually set new record lows. We have added some detail in this quarter's supplement showing our strong development margins, which demonstrate that it is a good time to be in the industrial development business today. Additionally, we expect that a strengthening economy boosted by fiscal stimulus and the post-pandemic reopening along with the secular trends towards increasing inventory balances and the growth in e-commerce, will continue to provide broad tailwinds to the industrial sector. Our industrial logistics portfolio currently is 99.4% leased, and we see strong demand and rent growth in all of our markets. At the same time, strong growth in demand has created some pressures, notably in the availability and pricing for key construction inputs. The most significant of these is the availability of steel bar joists used to support our building's roof structures. Recent pricing for steel bar joists is up materially and lead times have increased from 12 to 14 weeks to now up to 25 weeks. Other construction inputs, such as PVC piping and certain petroleum-related products, and even the cost of overhead warehouse doors, amongst others, also have seen significant price increases. While the strong growth in the industrial sector does have this added cost, we are fortunate that tenant demand is strong, and we expect rising rents will offset much of the impact of these input price increases. I'll touch on this a bit more specifically in a few minutes. Shifting back to the quarter's highlights, the most significant event during the quarter was the completion of the first underwritten public offering of stock in our company history. In early March, we raised nearly $110 million. which will support our development pipeline and future acquisitions, as well as general corporate purposes. Additionally, we believe this capital raise has helped diversify our shareholder base and will improve our stock's liquidity. We welcome the new shareholders in our company and thank them, as well as our existing shareholders, for their support. We remain focused on increasing shareholder value and providing a strong return on investment for all of our investors. I'll now discuss our plans to put this money to work. Since our last call, we've added one new development to our pipeline, a 234,000 square foot industrial logistics building in our new England Trade Port Industrial Park in Hartford, Connecticut. This is one of our last remaining master plans and entitled sites in the park, and we entered into a long-term pre-lease with a leading global shipping and logistics company for two-thirds of the space. This tenant will move from an existing building in the park, which they will vacate in the second half of 2022. and they will be more than doubling their presence with us. Given our low-cost basis in the land, we expect this project to generate a stabilized cash NOI yield of just under 8%, which is the midpoint of the range we provided in the earnings release. And this is inclusive of adjustments for the construction input price increases I noted earlier. I'll now comment on how these input shortages and price changes have impacted the rest of our pipeline. We have Bastille secured for both projects currently under construction. the build to suit for Amazon in Charlotte and the 103,000 square foot building in the Lehigh Valley. Both of these developments remain on schedule to deliver later this year. For the projects which have not yet broken ground, the availability of certain materials has pushed out the expected timing for delivery. Notably, the newest pre-lease building in Hartford I just described will deliver late in the second quarter of 2022. and both the 195,000-square-foot two-building Orlando Jetport project and the 206,000-square-foot American Parkway Lehigh Valley project are now expected to be completed in the second half of 2022. We currently estimate that the input cost inflation I described before, with steel being the largest factor, is creating an approximate $6 to $8 per square foot increase in total project costs. Using our current market rent assumptions, This increase in costs is not expected to have a material impact on the stabilized cash NOI yields for our development portfolio, which we continue to forecast to be between 6.1% and 6.6%. While we are hopeful that these cost increases and availability issues resolve more quickly than we have budgeted, the situation remains fluid, and we will continue to actively monitor the potential impacts on our project's timing and yields. All in, our development pipeline would add 879,000 square feet to our existing industrial logistics square footage. We expect the total cost for construction, inclusive of land, site work, building shell, and tenant improvements needed to stabilize these buildings to be 113.5 million, of which we have spent 20.6 million, including the cost of the land we recently purchased in Orlando for 5.25 million. We believe we have a favorable basis in the land we own or have under agreement for development. And with the continued compression in market cap rates, we believe our development margins have remained stable, if not moved higher, over the past few months. In the supplement, we show that our development pipeline's estimated weighted average development margin is expected to be between 32% and 50% based on a 50 basis point range spread of assumptions for market cap rates. This generates between $36 million to $56 million of value creation, which at the midpoint implies about $6 per share of value created. We look forward to adding these developments into our portfolio and to the incremental NOI contribution we'll receive as we lease them up. We also continue to actively evaluate acquisition opportunities, which potentially can more quickly contribute to our in-place NOI and leverage our existing infrastructure in G&X. To that end, we are pleased to have under agreement the purchase of a 127,000 square foot fully leased building in the Lehigh Valley, which remains a top performing tier one industrial market. The property is leased to a credit tenant with a large market capitalization that has a significant investment in the space. We believe the in-place rent is approximately 25% below current market, though the tenant has fixed renewals with 3.5% escalation starting in late 2022. So we see the downside scenario in this investment is that the tenant renews, and we continue to collect rent from a credit tenant at a good yield. If the tenant were to leave with some cost to re-tenant the building, we would expect a meaningfully higher rent and improved yield on our cost. Additionally, the site has excess land on which we believe we could create additional value. They're expanding the parking areas, creating outdoor storage, and they're building a sizable addition to the buildings. that we believe would generate a good return given the land already is part of the existing site. As reported by real estate brokers and in various recent reports on the industrial market, the strong sector tailwinds have pushed cap rates lower since the start of the year, and demand for industrial assets remains very strong. To compete, we will continue to make deep dives into a small group of target markets and focus on flexibly designed buildings of between 75,000 and 400,000 square feet. And like with the recent Lehigh Valley acquisition, we'll utilize our development expertise to identify opportunities to create value over time. In particular, we'll continue to look at the full range of assets, including land parcels for future developments, partially and fully stabilized buildings, and forward sales. Like many of you, we are monitoring the recent discussions regarding changes to the federal tax code and how that might impact our sector. It's our belief that some of the proposed changes could result in increased motivation for certain property owners to sell assets in the later part of this year. I would also note that our election to be taxed as a REIT, along with the finalization of our upREIT later this year, we believe puts us in a good position if certain of these tax changes are implemented. Switching to dispositions, we've been quite busy with our efforts to sell our non-core assets. and are pleased to have nearly 45 million in dispositions under agreement. In the first quarter and in the subsequent weeks leading up to this call, we entered into several significant agreements. We now have three of our flex office properties totaling 209,000 square feet under an agreement to be sold for $6.6 million. We previously had two of these buildings under contract that fell through last year. If we complete this sale, which is expected in the third quarter, along with one additional small flex office asset that we also recently put under an agreement for sale. Our remaining office flex portfolio will be reduced by more than half and will total approximately 176,000 square feet, representing only 4% of our total square footage as it stands today. Another significant disposition transaction is the sale of 1985 Blue Hills Avenue in Connecticut, a 165,000 square foot industrial building along with two adjoining land parcels, which we are selling to the existing tenant in the building. While typically we do not sell our industrial logistics assets, this building is not located in either of our main master plan industrial parks, and due to its specialized use, will require significant capital to reposition as a traditional warehouse logistics building. With the sale of this property and the addition of our new development at 110 Trade Port, We are modestly growing our Connecticut industrial logistics portfolio by a net 69,000 square feet, and we are improving our overall building quality in that market. As we've mentioned before, we are happy with our position in Hartford, but we will continue our focus on growing a relative share of our industrial square footage outside of Connecticut over time. We've also entered into several other land sale agreements, which include the potential sale of the former Florida nursery farms. And as a status update, our previously announced dispositions continue to proceed towards closing. Notably, Meadowood sales, part of a land conservation effort, continues to clear important milestones and appears on track to close later this year. We'll continue our efforts to monetize our non-core land assets, which other than the sales of the buildings I mentioned above, typically generate no NOI and often have some carrying costs due to taxes and maintenance. As we've done in the past, we plan to redeploy this capital into our industrial logistics portfolio, which in effect helps us to reduce the cost of capital in our acquisitions and developments. Our industrial logistics portfolio was 99.2% leased at the end of the first quarter from 94.3% in the previous quarter. During the past quarter, we completed the lease up of our two building spec development in the Charlotte market. As of today's call, our only vacancy in the industrial logistics portfolio is a 27,000-square-foot space in the Orlando building that we renovated and repositioned at the end of last year. Overall for the quarter, we completed four first-generation leases totaling a little under 202,000 square feet with a weighted average lease term of 6.5 years. These leases generally exceeded our performance expectations with respect to underwritten market rents. During the quarter, we also executed lease agreements for two of the assets in our development pipeline. The Amazon built a suit in Charlotte and 110 trade port in Connecticut, which I discussed earlier. We've already addressed the majority of our 2021 lease role. There are only two remaining industrial lease expirations, a 108,000 square foot space in Charlotte and a 57,500 square foot space in Connecticut with expiration schedule for November 30th and December 31st of this year, respectively. While we do not yet know whether either tenant will stay, fortunately, leasing momentum in our markets remains strong with asking rates continuing to climb and vacancies generally falling. Lastly, I'll briefly discuss our dividends. Last night, we announced the 15 cents per share dividend for the second quarter, representing a 60 cent per share annualized payout. We will revisit this quarterly amount from time to time as we seek to balance returning cash to shareholders with reinvesting in opportunities to grow our portfolio and increase shareholder value. As we think about this dividend over the medium term, we expect we will look at an adjusted funds for operations payout ratio. Given our potential growth opportunities, when we start to target an AFFO payout ratio, we expect it to be at the lower end of the range of our industrial peers, which currently sits at around 60% based on 2020 metrics. We also would point out that our company's relatively small size, our ASFO number bounces around from quarter to quarter. As, for example, the retenanting of a large second generation space or a significant capital project could materially impact this number. Therefore, when we evaluate our ASFO payout ratio, we'll likely look at our capital needs spread evenly over four quarters. We utilize the Green Street Capital Expenditure Reserve Estimate, which, as currently measured by Green Street, is around 15% of NOI for industrial REITs. So with that, I'll turn it over to Anthony for the financial review.
spk02: Thanks, Michael. Before I get into the first quarter financial results, I want to take a moment to remind you that our election to become a REIT at the start of 2021 required us to change our fiscal year end from November 30th to December 31st, effective in 2021. The change in fiscal year resulted in us having a one-month subperiod of December 2020 for the transition between our 2020 fiscal year that ended on November 30, 2020, and the beginning of our new calendar fiscal year, which started on January 1, 2021. The results of this one-month transition period were included in our 2021 first quarter 10Q that we filed yesterday. My comments today will mostly cover just the first quarter results, but we're happy to take questions on December 2020 at the end if there are any. Our industrial logistics cash NOI was $5.9 million for the first quarter, up 13.6% from last year's first quarter. Industrial logistics cash NOI benefited from the lease-up over the past year of first-generation space at Ambassador Drive in the Lehigh Valley and 160 International Drive in Charlotte, lease-up of vacancy at 20 International Drive in the Hartford area, and to a lesser extent, increases in rental rates. With respect to our non-GAAP measures, I will begin with same property NOI and cash same property NOI. For the 2021 first quarter, growth in same property NOI and cash same property NOI was 10.2% and 8.2% respectively versus the fiscal 2020 first quarter. For the trailing 12 months ended March 31, 2021, which we think is a better proxy for long-term performance, Our industrial same property NOI and cash same property NOI are up 8.2% and 3.4% respectively versus the prior periods. Our cash same property NOI for the 2021 first quarter over the 2020 first quarter benefited most from the leasing of a vacancy at 20 International Drive, which commenced in July of 2020, as well as leasing a first generation space at Ambassador Drive in the Lehigh Valley to two tenants, which started in March 2020. Cash same property NOI for the trailing 12 months ending March 31, 2021, over the prior year trailing 12-month period, benefited from the same positive changes as the first quarter, but was offset by free rent on a little over 200,000 square feet provided to the tenant at 4270 Fridge Drive in the Lehigh Valley, who displaced the neighboring tenant in an expansion that tripled their space. Looking forward, we note the potential for lumpiness in our quarterly same property NOI metrics, and expected growth rates shown this quarter to moderate somewhat over the year. Next, I want to mention Core FFO. Core FFO essentially takes NAREIT FFO and adjusts for a few expenses which are either non-cash or non-recurring, which includes G&A expenses related to REIT conversion, which were $0.2 million in the 2021 first quarter, as well as a change in fair value of financial instruments, which relates to the equity warrants we issued in a private placement last August, and for the month of December 2020, we are also adjusting for a write-off of registration costs for when we put our 2018 shelf and ATM program in place. Normally, those costs would be netted against the proceeds received from an offering, but since we did not utilize our 2018 shelf, we needed to write them off in December when the 2018 program was terminated. Since we mentioned the change in fair value of our financial instruments, it's worth noting that this line item will not be on our income statement after the third quarter this year. The contingent value rights expire upon the one-year anniversary of our private placement, which was completed in August 2020, and the liability associated with the equity warrant will be reclassified into the equity section of our balance sheet upon the one-year anniversary of the private placement, and therefore no longer adjusted to fair value each quarter going forward. Starting with our 2021 fourth quarter, these items will no longer impact our P&L. With that as background, core FFO was essentially flat in the first quarter of 2021 over 2020 at $2.5 million, as the growth in NOI was offset by changes in non-cash compensation, which I'll describe in a few moments. Before touching on non-cash compensation, I wanted to also point out that we've gone a step further in this quarter's supplemental materials and reconciled to AFFO. As Michael mentioned earlier, in the medium term, we will be considering future dividends in line with a target AFFO payout ratio. So we wanted to be able to provide some context to what that number looks like, but also warn that we do expect it to fluctuate somewhat quarterly as a large renewal has the potential to move the needle in a portfolio of our size. For this reason, we have still kept our cash core FFO metric so that you can get a sense of the true year-over-year cash performance of the portfolio and without some of the lumpiness that we may see quarter to quarter in our second-generation leasing and building maintenance capital expenditures. Now on to G&A. General and administrative expenses increased to approximately $3 million in the fiscal 2021 first quarter from approximately $2.1 million in the fiscal 2020 first quarter. Nearly all of this increase is due to an increase in non-cash compensation expense related to changes in our non-qualified deferred comp plan balances, which move consistent with the overall stock market performance. This is an important point as this expense is not tied to a change in what we're paying our staff this year versus last year, but rather a movement in the market value of the balances on a non-cash deferred compensation plan, which, like the stock market, can be volatile on a quarter-to-quarter basis. In the first quarter of 2020, the stock market declined with the onset of COVID-19, resulting in a negative expense of $0.4 million related to the decline in non-cash deferred plan balances. While in the first quarter of 2021, we saw significant positive stock market movement in the opposite direction as last year's first quarter. This created a non-cash expense of $0.4 million tied to our non-cash deferred comp plan, resulting in the $0.8 million increase in the expense for this year's first quarter versus the prior year's first quarter. Additionally, we've also begun capitalizing our in-house construction and development team salaries, which had less than a $100,000 impact of a reduction in G&A during the 2021 first quarter and was offset by investment in new hires made over the past year. We also recently added a general counsel to our team who has already made significant contributions and we believe that he will provide a net savings on our cash legal costs. However, this hire may have a slight negative impact on reported G&A as we previously could capitalize certain legal expense to outside firms. Looking ahead, I want to mention that we are undertaking an upgrade of our accounting technology systems to better prepare us for growth in the future. We are finishing our initial review and expect to proceed with implementation later in the second quarter and most of the work occurring in the second half of the year. We are evaluating the estimated impact this upgrade will have on our financial results and expect to provide an update and estimates with the second quarter report. Our capital expenditures for the first quarter of 2021 totaled $1.5 million, with the largest portion of $0.9 million related to the initial construction costs related to the Amazon Build-A-Suit in Charlotte and the 103,000-square-foot spec building in the Lehigh Valley. These numbers are expected to significantly ramp up in the second and third quarters as construction progresses. The balance of our first quarter capital spending related to completion of the renovations on the Orlando building we purchased in early 2020 and for other leasing-related costs. I'll now provide a bit more detail on the dispositions. Typically, our non-core asset dispositions, particularly for land, contribute little or no NOI or FFO, and therefore have an immaterial impact on our income statement until we redeploy the proceeds. As Michael mentioned, we have several flex office properties and one industrial logistics building in Connecticut under agreement for sale that will impact our NOI and FFO. Our office flex property portfolio totals approximately 393,000 square feet, making up 8.5% of our portfolio by square footage and is 71.3% leased. We have four office flex properties under agreement for sale and adjusted for these potential dispositions, our office flex portfolio would be down to approximately 176,000 square feet or only 4% of our portfolio and would be approximately 80% leased. Four buildings under agreement for sale totaling approximately 217,000 square feet generated approximately $2.2 million in both cash and GAAP NOI in the 2021 first quarter and approximately $1.1 million in GAAP NOI and approximately $0.8 million in cash NOI during fiscal 2020. Two of the buildings are encumbered by a $4 million mortgage with a 4.72% interest rate, which we intend to pay off at closing on the sale of these assets. The other building Michael mentioned is the 165,000 square foot industrial logistics building on Blue Hills Avenue in Windsor, Connecticut. We have the option to set the closing date of this transaction at any time between July 14th and December 15th of this year, providing us the flexibility to time the sale with a potential 1031 replacement property purchase. This building generated approximately 0.3 million in both GAAP and cash NOI in the 2021 first quarter, and $1.2 million in GAAP NOI and $1.3 million in cash NOI during fiscal 2020. 1985 Blue Hills Avenue is encumbered by an approximately $5.1 million mortgage with a 5.09% interest rate, which we intend to pay off at closing. I'll now turn to our balance sheet. In March, we completed an underwritten public offering of 1,927,049 shares under our shelf filing and raised just under $109 million after expenses. Also in March, we amended and increased our credit line with Webster Bank, providing us with up to $50 million of availability. And last week, we closed on a construction loan with J.P. Morgan to provide approximately $28 million for the construction of our built-to-suit facility for Amazon. This construction loan has a two-year term with a one-year extension option and an initial interest rate of 1.65% over one month LIBOR dropping to 1.4% over one month LIBOR upon the commencement of rental payments by Amazon. In summary, as of March 31st, 2021, we had approximately $182 million in liquidity, comprising of $132 million of cash on hand and the $50 million availability under our credit facilities that I described above. On top of this amount is the $28 million in proceeds we expect to receive from the fully drawn construction loan, and proceeds from our dispositions under agreement. Excluding the credit facilities, we have very limited near-term debt maturities other than the $4 million mortgage on the two office flex buildings, which as I mentioned earlier, we intend to pay off upon the sale of these properties. Lastly, I will wrap up just briefly touching on our leverage. Our current debt to total enterprise value is approximately 25%. Other traditional leverage metrics are impacted by the significant cash balances from the recent offering. Our current debt outstanding, net of our cash balance, is at a very low level, approximately $29 million. We expect to deploy our cash into developments and acquisitions to help grow our EBITDA over time and may selectively add additional debt, but our goal is to grow the unencumbered asset pool over time. I will now turn it back to Ashley.
spk07: Thank you, Anthony. Before going to a question and answer session, I also wanted to mention that we will start We will be participating in NAIRU's REIT Week virtual conference on June 8th through June 10th and look forward to meeting with some of you during that time. Operator, we'd now like to open the line for questions.
spk04: And I'll begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time we'll pause momentarily to assemble a roster. First question comes from Colin Catherwood of BTIG. Please go ahead.
spk05: Thank you, and good morning, everyone. It's a very strong quarter on the leasing front. Congratulations on the execution there. And you had mentioned the completion of the kind of value-add work. the Orlando asset, which you had acquired in February of 2020. The Charlotte assets had come into the portfolio from development in late 2019. Were some of these assets kind of, were you targeting specific tenants or specific uses, or is this kind of leasing bump in the first quarter really reflective of material pickup and demand in the small to medium-sized space market for Charlotte and Orlando?
spk03: Good morning, Tom. Thanks for the question and the comments. With respect to the leasing, I think in both the Charlotte and Orlando properties, we really designed those and thought about those as spec buildings with not particular tenants in mind. I think in Orlando, we were targeting a little bit smaller tenants. In Charlotte, the buildings, each were plus or minus 130,000 feet, and we thought we could go smaller to larger tenants. And so we really just designed the buildings to best meet what we thought was market demand. I think what was sort of widely reported last year, particularly in the early several months of COVID and the onset of the pandemic, kind of the smaller tenant demand had gotten a little bit quieter and you saw an influx of bigger demand as we kind of rolled through middle of last year kind of summer into the fall that smaller tenant activity started to pick up quite a bit. So we had done some good early leasing on the Charlotte buildings, as you mentioned, kind of late 2019, early 20, and then really saw an influx of demand later into the year and carrying into early this year. And same in Orlando, we sort of picked up some deals consistently sort of along the way in the second half of last year as we finished the renovations of that building. and have one space left that we're seeing good activity on.
spk05: Got it. Thank you for that, Michael. As we look at that leasing, obviously it addresses all of your availability in Charlotte, most of the space in Orlando. You entered those markets in 2017 and 2019. Given that kind of new market model that you've proven out, how are you thinking about expanding in to target markets outside of your current holdings?
spk03: Yeah, and as we've discussed, we're in four markets today. Our goal is to kind of expand that several more markets over the next couple of years. So we're really looking and identifying opportunities in several other markets. We've discussed in the past the Southeast and various markets along there, as well as the Mid-Atlantic are all within what we're targeting. And our approach sort of remains consistent, as you described, in Charlotte and in Orlando, where We can look to buy the range of product from unentitled raw land up to stabilized buildings and everything in between. And we recognize there's some strategic benefit to picking up a stabilized building while the markets are all competitive today. We believe we can find buildings that have the potential for significant rent growth over the long term. Again, that's why we're targeting those particular markets. It's not for what we think rents are today or tomorrow. where we think they're going in five to ten years and we'd like to be able to find opportunities where we have a nice mixture of that stabilized building value add and land and create the portfolios as we've done in in orlando where we now have the lands that we purchased and we'll commence development the next couple months on uh to complement the stabilized building we bought and some of the value add things we did there so eagerly looking for additional markets. And hopefully we'll have something, you know, in the not too distant future. But, you know, we'll see.
spk05: Understood. Understood. And then, you know, Michael, appreciated your comments on the 2021 expirations. Obviously, it's late in the industrial portfolio. But if we look at to 22, it's a pretty, you know, decent sized year, you've got almost 14% of annual revenue expiring. I know it's early to be thinking about some of those 22 leases, but when you think of the breakdown in markets where those expirations are located, you know, on a per square foot basis, it seems like it's probably Connecticut and Lehigh Valley. But can you provide some more color on where those are located and kind of how you're feeling as far as where those rents are compared to market right now?
spk03: Yeah, sure. So as you said, most of those vacancies come up in Connecticut and then in the Lehigh Valley. I'll start with Lehigh Valley first. The biggest piece is a 228,000 square foot building. where the tenant's been in the building since we purchased it. It's a 3PL doing business for a large multinational healthcare and consumer product company. So it's early days to know where they are. That lease was sort of a short-term renewal we disclosed last year. So we think there's good mark-to-market in that opportunity if that tenant were to leave, and that's towards the back half of the year, I believe September 30th. You know, I think in general, if you talk about our Lehigh Valley portfolio, I believe in the supplement, we show a little over $6 average rent. Today, you know, asking rent for buildings of our size are pushing above the $7 range. So we think there's definitely some mark to market in the portfolio and some in that one lease. The other bulk of the renewals are a series of different properties in Connecticut that You know, I think ranging throughout the year, starting in February. And if you get to the, to the back half of the year, you actually hit the one tenant that's expanding in our portfolio and doubling their space at some point towards the end of next year, they'll probably relinquish the space they're in. Uh, we felt good about that market. You know, there's been very strong demand and very good absorption in that market. you know, several ports of tenants, you know, struggling that have either been lost their space or need more space and struggling to find good class A space in the Connecticut Hartford market. So we felt good there. And again, we think there's over on our portfolio without getting to the specific leases, there's a good mark to market there with, with again, market rents trending towards that mid, mid to high sixes for new class A space.
spk05: I appreciate that, Michael. And then just last one for me is, Anthony, I just want to square some things off on the sale of 1985 Blue Hills Avenue. I believe that tenant had a purchase option where it was at the greater of fair market value or something like $11.5 million. If I'm correct with that recollection, did the purchase option also include the two additional land parcels that are under contract? And if it didn't, how is that kind of $18 million split between the land and the asset itself?
spk02: Well, first of all, the purchase option did not include the land. It was just for the building. And as you know, it expired.
spk01: It had already expired. So the So essentially the building, the sale that we have on the table now between the building and the additional parts of the land was a negotiation with us and the tenant.
spk05: Got it. So the option had expired, but the $11.5 million price that had been put on that option, which obviously said expired, when was that struck? What I'm getting at is it seems like even if we kind of – you know, run a general price per, per acre on, on the land that there's been a substantial increase in the value of that asset over that original option price of $11.5 million. Was, was that a, you know, 10 years ago price on that value or was that a more recent kind of, you know, expectation of market value?
spk01: No, it was, I don't remember. It was a long time ago. I don't remember exactly, but it was, it was a while ago.
spk03: I think it, I think it was actually part of the original lease or close to the original lease. So it's, Yeah, so it's well more than 10 years ago, Tom. So it's an old number that was just sort of ticked as a floor price, somewhat based on construction costs and other things and some estimate of inflation. As you got to that number, obviously buildings have appreciated much more than that, fortunately for us.
spk05: Got it. I appreciate all the color. Thanks, everyone. Thanks, Tom.
spk04: Again, if you have a question, please press star then one on your touchtone phone. Our next question comes from Dave Rogers of Baird. Please go ahead.
spk06: Michael Anthony, good morning. Thanks for all the color. You obviously have a really good problem, which is that you're 99.4% leased. So, Michael, I was wondering if you can give us a little bit more color on the thought process and potentially the acquisition pipeline about bringing on some nearer-term vacancy. Are you comfortable doing that more aggressively, or are you continuing to focus maybe more on the longer-term development story, just given the fact that your occupancy today is so high?
spk03: Yeah, no, it's a good question. I guess it's a good problem to have, and rather have higher vacancy than lower. So, again, we feel good about our current portfolio, and I think it just speaks to you know, the strength of the markets we're in and to be, you know, honest and clear that obviously many industrial markets are experiencing great demand. So given that as a backdrop, you know, I think we're comfortable taking on some vacancy and an acquisition as a value-add opportunity. You know, I earlier mentioned, you know, potentially looking at some forward sale opportunities as well where we contract with a developer who has a land site approved or under construction and effectively a grito price today to buy that building vacant. You know, they're building a spec building say six or nine months from today, which kind of fits our model pretty well, given our history as a spec developer. So we've always sort of taken on leasing risk because we feel we're in good markets and building good quality properties that we believe will lease up well over time. And by doing it as a forward, you know, we're not, we're paying less than if we're buying a stabilized building today, you know, a premium if we developed it ourselves, but we're obviously not using our development resources or having to fund that over time. We can fund the purchase at completion much closer to generating cash. That's one opportunity, but as you said, some value-add opportunities and vacant buildings that might be out there or partially leased is definitely on the table for us. Again, we're going to look at the range of acquisitions and you'll realize we have a good amount of capital that we can put to work both in our development pipeline and into acquisition. So, you know, tied our list, we have, as I mentioned with Tom's question earlier, several markets we continue to look at as well as opportunities within our own markets to find the right buildings and hopefully the vacancy if we buy something that's vacant, temporary, because we so strongly about the direction of the market, the absorption, and our ability to kind of stabilize that asset.
spk06: Great, thanks for that. The asset that is in Lehigh Valley with the existing tenant, it sounded the way you described it, that the tenant may not want to leave. And if that's the case, are you able to get to any of the land improvements or do you expect a building addition there? Does that all need to assume that the existing tenant leaves to kind of get to all of that?
spk03: Yeah, not necessarily. There's a potential, for example, that the existing tenant, because they have a fairly significant investment and their processes in the space may need some additional storage, for example. So that could be an additional standalone building on the site or a potential addition. But likely a major realization of value likely would be tied more to that tenant probably leaving. Just again, the way they're using the facility, they may not need all those improvements. And as we said, we felt great having a great credit, paying us a good rent, with starting if they renew at the end of next year, which given their investment, we sort of think is likely. You had a 3.5% clip starting sort of in 23. We think, as we said, kind of a good downside to an investment, if that's our downside. And at some point, if they leave or they decide they need to do different things with the facility, there's lots of optionality with the excess land, as we described, whether it's outdoor storage or additional parking or a building addition or separate small building that we could obviously charge additional rent for.
spk06: Okay, I appreciate that. Last, it sounded like you were detailing really a 5% to 10% increase in your construction costs related to just steel alone is the way I took your comments. from an overall construction cost standpoint, what other major changes are you seeing? I guess labor comes to mind. So any comments on maybe labor specifically and overall construction cost increases if the six to eight dollars that you mentioned wasn't inclusive of kind of all the components?
spk03: Yeah, actually, the six to eight was including sort of our latest budget estimates was including all the costs. Steel is the biggest piece of that, but it included some of the estimates, for example, PVC piping, for sort of water lines and things like that. You know, the overhead doors I mentioned, roofing products. So that was all inclusive as of today. You know, labor is a piece of the contractor's bid. We haven't, you know, based on what our construction group has seen, that hasn't, it's gone up a little bit, but hasn't been a huge driver of the cost increase. So far, it's really been steel by far is the biggest piece of it. These others have some different and smaller impacts. But if you remember, if you think about a cost of a building, it's kind of the building shell. There's the site work, which is really just machines pushing dirt around and the paving, which is unrelated. Obviously, land costs and other things that all have their own pieces that go into the cost. So steel is a big increase, but it's not like it's 30% of our overall building costs either. It's a fairly small piece. It's just gone up a lot. Gotcha.
spk06: All right. Thank you.
spk04: With no more questions, this concludes Indus Realty's Trust First Quarter 2020 earnings call. I'd like to return the call back to Ms. Ashley Fizzell for any calls or remarks.
spk07: Thank you, everyone, for joining, and we appreciate the time. Always feel free to reach out with any follow-up questions, and we'll look forward to seeing many of you at NARIT in the coming months.
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