INDUS Realty Trust, Inc.

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.

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?

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.