INDUS Realty Trust, Inc.

Good morning and welcome to Indus Realty Trust's 2022 first quarter earnings conference call. This call will be followed by a question and answer session. You may add yourself into the queue for questions during any time over the course of this call by pressing star then one on your keypad. In addition to regularly available earnings materials, Indus has also published a supplemental presentation which is available on its website at www.indisrt.com under the Investors tab. This conference call will contain forward-looking statements under federal securities laws, including statements regarding future financial results. 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 the company's most recent 10-K filing as updated by its quarterly report on Form 10-Q in subsequent quarters. Additionally, the first quarter results, press release, and supplemental presentation contain additional financial measures such as NOI, FFO, Core FFO, and EBITDA that are non-GAAP financial measures. The company has provided a reconciliation to those measures in accordance with Regulation G and Item 10E of Regulation S-K. The company's speakers this morning are Michael Ganzon, Indus' CEO, who will cover recent activity, market conditions, and updates in our pipelines. He will be followed by John Clark, the company's CFO, who will cover the first quarter results in detail. After the prepared remarks, the line will be opened up for your questions. With that, I'll turn the call over to Michael.

Good morning, everyone, and thank you for your continued interest in Indus. 2022 is off to a great start for our company. We continue to achieve strong results with our current portfolio 100% leased and our acquisition and development pipelines adding new projects that will deliver strong returns on investment and grow our cash flow. At the same time, we recognize the uncertainty that the current geopolitical climate high rates of inflation, rising interest rates, and continuing supply chain disruptions create to the United States economy and the capital markets. Despite these potential challenges, the logistics sector continues to perform extremely well, with widespread demand across our markets from a diverse group of tenants. The ongoing difficulties with the supply and availability of goods, increased fuel and labor costs, and the continued drive to reduce delivery times create broad-based, long-term tailwinds in demand for logistics space. This need is driven not just by pure play e-commerce companies, but by a diverse range of industries seeking to improve their supply chain efficiencies. Industries including industrial manufacturers and distributors, omnichannel retailers, consumer packaged good companies, healthcare and pharmaceutical companies, amongst others. Our recent lease signings include an expansion in Charleston by Cummings, a major industrial manufacturer, Walgreens, which leased space in the Lehigh Valley for pharmaceutical distribution, and a major home improvement retailer taking space in Charlotte for same-day delivery of building materials to job sites. These tenants I just mentioned all are investment grade. This strong demand is coupled with low vacancies and limited supply in the markets. Tenants simply have very few options for space in any of our geographic markets. As an example, subsequent to quarter end, we addressed our largest 2022 lease expiration with a renewal in the Lehigh Valley. This lease was with a $30 billion market cap investment grade global 3PL servicing a very large investment grade multinational client in that space. This tenant was paying somewhat above our Lehigh Valley average rent as a result of a shorter term renewal they did a couple of years ago. With essentially no alternative space within the market, the renewal terms had no concessions and an initial rate nearly 40% above the in-place rent. We do not see the warehouse supply situation changing meaningfully for the next several quarters. 2021 year-end deliveries were significantly below the beginning of that year's forecast, and we expect the same to happen in 2022. In the first quarter, approximately 86 million square feet delivered according to CBRE, which annualized is well below the 2022 forecast and also is below current demand. Challenges on the delivery front include delays in receiving permits and final entitlements, as well as in the availability of key construction inputs. In response to these challenges and to take advantage of this expected supply and demand imbalance, Over the past couple of quarters, we've targeted acquisitions that had short-term leases in place or were partially leased, as well as added to our pipeline of forward purchases. We also proactively ordered materials and built in more improvements into our development to make them move-in ready upon delivery. More broadly, in thinking about Indus and the current environment, I feel really good about where we sit today. Including the acquisitions scheduled in our pipeline, we've expanded from four markets at the start of 2021 to seven by early next year. These markets have multiple drivers of demand across a broad base of industries. The Lehigh Valley and Hartford logistics markets service very large population corridors with significant economic output and spending power. These markets are advantageous locations for regional distribution with very high barriers to entry. Our southeast markets continue to benefit from tremendous population and economic growth. In our experience, population growth leads to housing starts, new business formation, and the increased need for medical, commercial, retail, and hospitality offerings. This, in turn, drives increase in demand for logistics space, last mile local and regional distribution. Additionally, the southeast benefits from the growth in manufacturing. I mentioned Cummings earlier, which has a large presence in Charleston, And I'll note in the Carolinas, there have been a series of major facilities opened or announced, including for the production of EV vehicles, batteries, beverages, pharmaceuticals, and furniture, amongst others. While we don't own these large-scale manufacturing plants, our tenants supply those nearby facilities. Lastly, in the southeastern markets, land for industrial anywhere near the population center is increasingly scarce as these fast-growing metros continue to sprawl. As a result, industrial competes for sites with residential, commercial, retail, and other uses. And when people want to live and work, they don't really want industrial. So we are really pleased with our current holdings, which are difficult to replicate locations. Next, I'll touch on our internal growth. Our current in-place annual escalations average approximately 3%. Our recent leases have averaged above that, with 3.5% to 4% becoming more typical across our markets. We also have a significant mark-to-market rent in our existing portfolio, which we conservatively estimate at approximately 23% on a cash basis. We expect this mark-to-market to continue to increase due to upward pressure on rents and the quality of our portfolio. We think this is a particularly strong number, given that our portfolio has grown quickly over the last couple of years, giving us a larger percentage of leases with recent commencements. While we do not have significant tenant rollover in the near term, our development and forward purchase pipeline will continue to benefit from the rising rate environment. Speaking of our pipelines and external growth, we have 1.9 million square feet and approximately $225 million in investment in our current acquisition and development pipelines. We estimate the initial stabilized yields on this pipeline to be in the mid-5% range, which is meaningfully above current market cap rates. And this assumes a 95% occupancy on spec space, which effectively lowers the yields by about 25 basis points. More importantly, we expect these investments to deliver strong returns on investment over time, as we believe rents and yields will increase given these properties' quality and locations. For both our acquisition and development pipelines, we take a conservative view on rents. That said, we do expect meaningful rent growth due to scarcity of supply and the continued increase in replacement costs due to inflation, and growth in land prices. Completion of this pipeline will occur throughout 2022 and into 2023, with dates noted in our supplement. We typically assume 12 months of lease up upon a project's completion or closing of a value-add acquisition, with no leases in place upon the delivery of our spec developments. We are excited to add a new project to our development pipeline this quarter, a 91,000 square foot warehouse in the Lehigh Valley. The Lehigh Valley continues to perform extremely well, and this site is in a core infill established business park with excellent highway access. The site has most of its entitlements in place, and we hope to close on this land later this year upon receipt of the final approvals. In terms of our existing pipeline, we expect to receive the CFO for our two-thirds leased 103,000 square foot project in the Lehigh Valley in a few weeks. Our two-building Orlando project, Landstar Logistics, is on track to deliver later in the third quarter, and we are seeing excellent pre-leasing interest. We also expect to deliver our Hartford, Connecticut project that is two-thirds pre-leased towards the end of the third quarter. We have users expressing interest for the balance of that space now that we've commenced putting up the walls. Lastly, we've commenced the construction of our next project in the Lehigh Valley, a 206,000 square foot warehouse we expect we'll deliver in 2023. Turning to acquisitions, we're very pleased with the pipeline of building purchases we have under agreement. We believe all of these projects are amongst the best located in the respective markets, and those with near-term deliveries are attracting good tenant interest. These forward purchases provide a strong complement to our own development activities and leverage our existing capabilities and market knowledge. And importantly, our efforts to secure these properties are paying off in the current environment. With this pipeline, we do not have any risk with respect to construction cost inflation as we have a fixed purchase price, but we will continue to benefit from market rent growth. As an example, using current market rent, we expect the yield on the Charlotte acquisition in our forward pipeline to be more than 100 basis points above our initial underwriting, and there are still several quarters of potential rent growth until this property delivers. We are announcing today that we are in contract to purchase a fully leased 205,000 square foot last mile portfolio in the Orlando and Palm Beach markets. These properties are in irreplaceable locations with essentially no new development nearby, and we are particularly excited to have our first properties in the South Florida market. We believe the current in-place rents are more than 15% below the current market, and we expect to capture that rent spread as tenants roll over time. Our team continues to do an excellent job of evaluating and sourcing opportunities, many of which are off-market and lightly marketed, and we remain active in evaluating and diligencing land sites and properties to add to our pipeline. We recognize the current uncertainty due to the economic and geopolitical news, but we have used similar periods in the past to create value for our company. For example, in the spring of 2020, we put under contract the land for Landstar Logistics, after another group dropped it due to the onset of the COVID-19 pandemic. With our targeted strategy, we are prepared to seize upon select opportunities that may arise from any current uncertainty. As part of our preparation, we have the capital structure in place to support this growth. In addition to the $126 million of cash on our balance sheet, we put in place a $150 million delayed draw term loan as part of an expansion of our credit facility. None of our planned mortgage repayments With the term loan and cash, we have all the capital in place to fund our current acquisition and development pipelines with some dry powder. And for any future opportunities beyond that amount, we have substantial additional borrowing capacity under our revolving line of credit, in addition to any other capital we may source. Lastly, but most importantly, I want to thank the INDIS team for their continued hard work and exceptional performance. It is through their efforts that we achieved our results, and are in a strong position for future success. With that, I'll turn it over to John for the financial review.

Thanks, Michael. Just starting with some of the headline figures, core FFO for the first quarter was $4 million. That's a 66% increase over the comparable quarter of the prior year. Core FFO benefited the most from growth in NOI. NOI was 8.7 million for the first quarter. That's up nearly 30% from the prior year's first quarter. Growth was driven principally by the impact of acquisitions during 2021, including the addition of the Charlotte build-to-suit that we placed in service of October of last year, as well as increase in occupancy in the value-add acquisitions and previously delivered spec developments. As Michael noted, as of March 31st, our occupancy is 100% both in total and for our stabilized in-service portfolio. AFFO for 2022 first quarter was $3.4 million compared to $1.9 million for the first quarter of 2021. With our limited recent tenant rollovers, our second generation leasing costs were relatively low this quarter. We also had a low level of maintenance capex expenditures. We expect about $1.3 million in maintenance capex spread over the next three quarters. That includes about $600,000 for a roof replacement, with about 80% of that cost expected to be incurred in the second quarter. In March, we announced that we had commenced a process to fully exit our remaining Office Flex portfolio. These assets are reported as held for sale, and operating results are recorded as discontinued operations for all the periods that we present. As a result, our core FFO, AFFO, NOI, and other financial measures exclude these assets. The OfficeFlex portfolio is unencumbered, and once sold, the proceeds will be used for the acquisition and development pipeline that Michael spoke about. We've received good interest from prospective buyers in a rather short period of time in marketing the portfolio, and we anticipate we'll be under contract before 2Q is done and will complete a sale sometime in the second half of this year at a price that's above the gap net book value. Cash same property NOI for 2022 first quarter was up 8.9% with the comparable versus the comparable 2021 period. Cash same property NOI benefit the most from the burn off of free rent on first generation space. For the last several quarters, our same property pool is 100% leased, and we expect to have very few new leases in the same property pool during 2022. This will make for tougher comparisons over the course of this year. At the same time, the same property pool represented about 75% of our total cash NOI for the 2002 first quarter. And as our acquisition and development activity ramps up, a larger and larger percentage of our total portfolio is not going to be covered by the same store metric. Wrapping up, just a few things on the income statement. Interest expense decreased about $230,000. That principally reflects an increase in capitalized interest, which just corresponds to the increase in the development activity. G&A expenses were $2.9 million for the 2022 first quarter, which is essentially flat from the corresponding prior year quarter. excluding the non-cash mark-to-market charge related to the non-qualified deferred compensation plan. G&A expenses would have been $3.2 million. The 2022 first quarter numbers include a reversal of an accrual for capital-based state taxes that we no longer will pay because of our REIT election. That was about $170,000. And that's been mostly offset by about $175,000 in expenses related to the continued build-out of our financial systems and accounting platform. Overall, we're expecting to incur about $350,000 in costs related to the accounting system project this year. I'll next turn to the balance sheet. Our liquidity at the end of the first quarter was $226.4 million. That reflects $126.4 million in cash. plus the undrawn capacity on the credit facility. As Michael mentioned, subsequent to quarter end, we amended our credit agreement and added a $150 million delayed draw term loan to the existing $100 million revolving credit facility. Based on our current leverage, the term loan has a floating rate equal to 115 basis points over SOFR. We elected to swap to fix this to an effective rate of 4.15%. Currently, there's no amounts drawn on the term loan, but we expect to repay about $62 million in mortgages at the end of May with the first draw that we will do on the term loan. The remainder of the term loan remains available to fund acquisitions and developments, as well as repay other mortgage debt. This credit facility now has an accordion feature that enables us to increase the borrowing to up to $500 million. We're very pleased with this transaction as it significantly increases our financial flexibility while maintaining a conservative debt-to-enterprise value ratio. And with the mortgage paydowns, we will unencumber a number of assets which will increase our borrowing base. With the repayment of the $62 million mortgage debt from the first draw on the term loan, other than an outstanding $26 million construction loan on the Charlotte build-to-suit, we'll have no debt maturities for five years. I'd also just like to make a quick note on the balance sheet regarding the strength of our tenancy credit. Our collection experience is and has been excellent. Accounts receivable is less than $1.6 million and is comprised of current balances due from tenants. In this quarter's release, we provided some additional earnings guidance information for the second quarter and full year. Please note that these assumptions only include what is identified in our acquisitions and development pipeline schedules that were in our press release. and do not include the Florida portfolio acquisition that we announced today, as we're still completing our diligence. For the 2002 second quarter, we estimate GNA, excluding the mark-to-market charge for the non-qualified deferred comp plan, will be slightly higher than Q1 2022, with a slight increase in non-cash stock-based compensation versus the first quarter. Last year, we began issuing stock compensation with a three-year vesting period, and the impact of annual grants start in the second quarter of each year. We estimate interest expense will be comparable to Q1 2022, and we do not expect a significant change in our current debt outstanding. Again, we plan to make the initial $60 million drawdown on our new term loan in Q2 with the proceeds going to extinguish near-term mortgage debt maturities. And the average borrowing cost of the debt that we're going to extinguish is essentially the same as the effective rate on the term loan. Interest expense is net of capitalized interest. In the first quarter, we capitalized about $350,000 of interest. And it's fair to say with the development activity, we'll continue to capitalize about the same amount of interest next quarter. For the full year, we estimate full year NOI from continuing operations at $35 to $38 million. This narrows the range of guidance provided at year end of $34 to $38 million. NOI from continuing operations excludes the office flex portfolio, which we had put up for sale. And historically, that portfolio had generated about $1.1 million in NOI annually. We estimate G&A excluding the mark-to-mark charge for the non-qualified deferred comp plan to range between $13 million and $13.6 million. which is consistent with the G&A guidance we provided in Q4 earnings. And included in that figure is approximately $1.8 million of non-cash stock compensation. Also for the full year, we estimate interest expense of approximately $6 to $6.5 million, or I'm sorry, $6.6 million. This assumes the first drawdown on the term loan in 2Q of 2022 of $60 million, a second draw on the term loan during the fourth quarter, of $30 million, which will fund acquisition pipeline and development spend. The remaining drawdown on the term loan will likely occur in 2023, not in 2022. Based on our development activity, quarterly we expect we'll capitalize interest at a quarterly rate that is similar to Q1 2022. With that, I'll just turn it back over to Michael.