INDUS Realty Trust, Inc.

Good morning, and welcome to the Indus Realty Trust's 2022 Second 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 dialing star then one on your keypad. It is now my pleasure to turn the program over to Ashley Pizzo, Vice President of Capital Markets and Investor Relations at Indus.

Thank you, and good morning, everyone. Welcome to our 2022 second quarter earnings call. In addition to regularly available earnings materials, INDIS 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 expectation, 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 our quarterly report on Form 10-Q and subsequent quarters. Additionally, the second quarter results press release and supplemental presentation contain additional financial measures such as NOI, FFO, Core FFO, Adjusted FFO, and EBITDAF, which are all non-GAAP financial measures. As such, we've provided a reconciliation to those measures in accordance with Regulation G and Item 10E of Regulation SK. Our speakers this morning are Michael Gamson, and is the CEO, who will cover recent activity, market conditions, and updates in our pipeline, followed by John Clark, our CFO, who will cover the second 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.

Thank you, Ashley. Good morning, everyone, and thank you for joining us today. We delivered strong results in the second quarter, and our business is well positioned for strong external and internal growth into the future. Since the start of the year, we've added over 520,000 square feet, representing more than a 10% increase to our in-service portfolio. And we expect to add another 875,000 square feet over the next six months. Our current portfolio remains well leased, and we are actively pre-leasing upcoming deliveries at rents above our underwriting. Our leases have market escalations, which continue to trend up, and the portfolio has embedded mark-to-market rents, both of which will support continued internal growth. We are growing our cash flow and delivering strong returns in our investments. Currently, the overall industrial market is experiencing record low vacancies, with rental rates growing strongly across markets. Tenants remain active, and overall new supply remains in check due to continuing delays in receipt of approvals, permits, and critical construction materials. That said, we recognize that the capital markets have changed since the start of the year, and a continued uncertainty regarding economic growth, inflation, and other factors could impact the operating environment over the next several quarters. We believe that with the strength of our portfolio and our balance sheet, we are well prepared for any change that may occur. We have strong tenancy, with over 75 percent of our tenants or their parent companies having either more than $500 million in revenues or are publicly traded, and approximately a third of our tenants are investment-grade rated. And I'd add, This statistic excludes some large companies that are major tenants for us, such as Ford Motor, Tesla, and Kuninagal. Additionally, our rent collection history is excellent, and we've recorded no bad debt expense in 2022. We ended the second quarter 99.4% leased, and going forward, we have a relatively small number of leases rolling over the next two years. Subsequent to the end of the second quarter, we leased the only vacancy of 35,000 square feet that was in the recently completed 102,000 square foot Lehigh Valley warehouse. The lease rate for this space was nearly 30% above the rate we achieved with the adjacent tenant last fall. And this resulted in a stabilized yield for the project at more than 50 basis points above what we estimated at the start of this year. Also, at the end of July, the short-term tenant at Paragon Way in Charlotte vacated that 217,000 square foot building. This building is move-in ready, which makes it well-positioned for fast-moving requirements, particularly given construction and other delays prevalent throughout the industry. Vacancy in the Charlotte market is 1.6%, according to Cushman and Wakefield, and the only competitive space is in a spec building that is expected to deliver in the next couple of months and is located in a different sub-market. We expect upon releasing, we'll meaningfully exceed our initial underwriting, and we are encouraged by current prospective tenant discussions. We also are making good progress pre-leasing our upcoming future deliveries. These buildings are well located across a number of markets, and we believe are best-in-class assets in strongly performing regions with multiple demand drivers for logistics space. We have fully leased our upcoming 234,000 square foot delivery in Connecticut, with the initial tenant in the building taking the rest of the space. The rent for this expansion is 17% above what the tenant is paying for its initial space. We also have executed one lease in our upcoming 195,000 square foot Landstar logistics delivery in Orlando. With that two building project nearing completion, we are seeing significant tenant activity and RFPs. We also have strong prospects for the remaining vacancy in the 42% lease two building Nashville acquisition. The buildings are essentially complete and the existing tenant is already operational. The delay in closing that purchase is related to some off-site work the developer needs to complete, which got held up in permitting, documentation, and approvals. We expect to close on this acquisition late in the fourth quarter when this last bit of work is completed. The Landstar Logistics project in Orlando will enter our in-place portfolio later this month. And with the Paragon building, this will likely lead to a somewhat lower overall portfolio occupancy rate next quarter. that we're hopeful will fill those spaces relatively quickly. In terms of upcoming lease expirations, other than Paragon Way, the only lease expiring in 2022 is a 73,000-square-foot space occupied by the tenant that is expanding and relocating into the 234,000-square-foot building I mentioned earlier that's expected to deliver at the end of September. That tenant expects to overlap in the two buildings for several months. So we do not expect to really get that space back until early next year. In 2023, the largest lease expiration makes up approximately 60% of our total expirations by square footage. That tenant has a renewal notice date at the end of August for a one-year renewal. We are in preliminary discussions with the tenant regarding their intentions, including a possible longer-term renewal, but these conversations remain in the very early stages. And looking at our overall disclosed acquisition and development schedules, we have 1.8 million square feet and approximately $173 million in purchase price and remaining development costs. We expect this combined pipeline to stabilize at a high 5% stabilized yield. I'd also note that for our initial stabilized yields, we use estimates of current cash rents rather than projected or net effective gap rents at expected completion. Additionally, these yields assume a 95% occupancy factor. As a result, these yields typically understate what we realize upon completion and when a building becomes 100% occupied. We are very pleased with the building purchases we have under agreement. Our estimated stabilized yields on this acquisition pipeline continue to increase as rents push upwards across our markets. For example, based on our current preliminary tenant discussions for the Charleston forward acquisition, our initial stabilized yield would be more than 60 basis points above what we estimated at the start of this year. Turning to developments, in addition to the deliveries I already mentioned, in the Lehigh Valley, we are underway on our 206,000 square foot building, and we expect to close during the third quarter on the land site to support a 91,000 square foot building. The Lehigh Valley market remains very strong with estimated vacancy below 2% and limited new development opportunities, all of which continues to support the strong rent growth I mentioned earlier. For developments overall, construction costs remain elevated, though recently these increases have been at a more measured pace. Lead times for certain items like steel have shortened over the past couple months, but other items such as dock levelers, electrical panels, and transformers and HVAC units are being quoted up to a year for delivery. We have learned to plan and manage around these delays. We continue to proactively order materials and build in more improvements into our development to make them move-in ready upon delivery. Overall, these issues continue to stretch out everyone's delivery pipelines, which delays the increase in overall supply into the market. Our development yields remain strong, and as I mentioned before, we are using our best estimate of costs in current cash rents, along with a 95% occupancy factor. Right now, the acquisition market is somewhat in a process of price discovery, with very few trades making it hard to discern current individual market cap rates. In the markets we closely follow, the few trades that have closed, or the deals that are awarded or under agreement to buyers, the cap rates typically have been lower than what we would have predicted. Our acquisition development pipelines will support external growth through next year and well into 2024 and represent 31% growth in our square footage from where we stood at the end of the 2022 second quarter. And importantly, in the current environment, we have all the capital we need to fund these future developments and acquisitions, utilizing the cash on our balance sheet and available future draws on our term loan. Also note that some of the spending extends out well into next year and even into 2024. providing us some flexibility with the timing of these capital needs. We have a history of making strategic investments in periods of uncertainty and remain very targeted in our pursuits. One particular area on which we continue to focus is on land for development. As good industrial sites remain very hard to find, the entitlement process can take 9 to 18 months or longer, and typically we do not purchase the land until these entitlements are completed. We feel we have the financial flexibility to continue to pursue select opportunities while maintaining conservative leverage ratios by using the capital on our balance sheet, undrawn lines of credit, and asset recycling, including the continued pursuit of selling non-core land holdings. Lastly, I want to highlight a few of our sustainability initiatives. We recently received approval to install solar arrays on top of two of our Connecticut warehouses. These rooftop solar installations will generate just under one megawatt of electricity and are the first of what we hope will be several solar opportunities across our portfolio. We are also rolling out an LED lighting upgrade opportunity for our tenants. As of the end of last year, we already had energy-efficient lighting in 100% of our portfolio with approximately 50% penetration of LED, but our goal is to convert the entire portfolio to LED in the future. Lastly, we are recognized as a green lease leader, which reflects our team's efforts to incorporate energy efficiency and sustainability into our leasing practices. I'll conclude with thanking the Indus team for their continued hard work and exceptional performance. We take great pride in our very low employee turnover and the long tenure of our staff. It is through their efforts that we achieve our results and are in a strong position for future success. With that, I'll turn it over to John for the financial review.