LXP Industrial Trust

Good morning and welcome to the Lexington Realty Trust second quarter 2021 conference call-in webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Heather Gentry, Investor Relations. Please go ahead.

Thank you, operator. Welcome to Lexington Realty Trust second quarter 2021 conference call and webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website in the investor section and will be furnished to the SEC on a form 8K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Lexington believes that these statements are based on reasonable assumptions. However, certain factors and risks, including those included in today's earnings press release and those described in reports that Lexington files with the SEC from time to time, could cause Lexington's actual results to differ materially from those expressed or implied by such statements. Except as required by law, Lexington does not undertake a duty to update any forward-looking statements. In the Earnings Press Release and Quarterly Supplemental Disclosure Package, Lexington has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFL refer to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis. Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington's historical or future financial performance, financial position, or cash flows. On today's call, Will Eglin, Chairman and CEO, Beth Bulleris, CFO, and Brendan Mullenix, CIO, will provide a recent business update and commentary on second quarter results. Executive Vice President James Dudley will be available during the Q&A portion of our call. I will now turn the call over to Will.

Thanks, Heather. Good morning, everyone. We had a terrific second quarter with excellent results in all areas of our business. Our business continues to produce funds for operations well in excess of our dividend. and our net asset value per share is steadily growing as strong rent growth, increasing construction costs, and attractive debt financing drive property values higher. Leasing continues to be a particularly bright spot for us and is further evidence of the quality of our industrial portfolio and strong fundamentals in the industrial sector. We leased roughly 1.1 million square feet in the quarter, with industrial base and cash base rents increasing approximately 13% and 7% respectively on four lease extensions. July proved to be another exceptionally strong month of leasing with over 2 million square feet of activity. We have secured a five-year lease with a new tenant at our previously vacant 640,000 square foot warehouse distribution facility in Statesville, North Carolina, with a 3.4% cash base rent increase over the prior lease and 3% annual escalations. We also secured a three-year lease term with a new tenant at our 1.2 million square foot industrial facility in Olive Branch, Mississippi. The new cash base rent represents a 1.7% increase over the prior rent with 2.25% annual bumps. With little downtime to lease a lot of square footage in a competitive market, this transaction is a big win and a testament to our asset management capabilities. We continue to proactively create leasing opportunities as we address forward lease rollover. With one of our 2023 expirations, we just signed a 10 and a half year lease with a new tenant at one of our warehouse distribution facilities in the Cincinnati market. This was a great outcome as we replaced a tenant that was a move-out risk, increased the cash-based rent approximately 27%, and extended the overall lease term. In addition, we had a great outcome with respect to our first quarter industrial purchase in Lakeland, Florida. The property was acquired with 105,000 square feet of vacancy as part of our strategy to take advantage of industrial demand and rising rents and provide more attractive stabilized yields compared to investing in fully leased buildings. In July, we leased roughly 68,000 square feet of the vacant space for a five-year term to a new tenant with a starting rent of $5.70 a foot with 3% annual bumps, representing an occupancy increase from 53% to 84%. Our strong leasing outcomes are a primary driver behind increasing both the low and high end of our 2021 adjusted company FFO guidance range by a penny to a new range of 74 cents to 77 cents per diluted common share. Moving to dispositions, during the quarter we sold three properties for approximately $125 million. These dispositions included two office sales and our Lawrence, South Carolina legacy industrial asset. At June 30th, total consolidated sales volume totaled $183 million at gap and cash cap rates of 7.3% and 7.9% respectively. Subsequent to quarter end, we disposed of three non-industrial properties valued at $35 million. leaving just 11 office and other properties remaining, excluding our ground lease Palo Alto property. These 11 assets generated net operating income of approximately $8 million during the first six months of 2021, and we currently value these assets within a range of $150 million to $190 million. Investment activity has been robust to date, with $275 million closed as of June 30 at GAAP and cash estimated stabilized cap rates of 5.1% and 5% respectively. The start of the third quarter has also been active with $106 million closed in July and another $106 million currently under contract that is expected to close later in the quarter. In a competitive industrial market, we continue to view development projects and the purchase of vacancy as compelling opportunities to capture attractive, stabilized yields for quality product in our target markets. Construction is fully underway at our development projects in submarkets of Indianapolis and Central Florida, and our Atlanta project achieved substantial completion of the base building during the second quarter. We have strong leasing prospects at this facility and are currently responding to RFPs. Subsequent to the quarter, we committed to a development opportunity in Greenville Spartanburg. Our development projects in progress are expected to require funding of approximately $271 million, and our forward equity sales match up well for the funding of these projects. We've nearly completed our portfolio transition with our industrial portfolio now representing 94% of our gross real estate assets, excluding held-for-sale assets. The work we have done on the portfolio has paid off, and we're extremely pleased with how the portfolio continues to perform and be shaped through the purchase and development of modern, high-quality Class A warehouse distribution product in our target markets. With that, I'll turn the call over to Brendan to discuss recent investments in our development pipeline.

Thanks, Will. Second quarter acquisitions included seven industrial facilities for $205 million, a gap in cash estimated stabilized cap rates of 4.8% and 4.7%, respectively. During the quarter, we added to our portfolio holdings in Southeast Houston with the purchase of a three-property stabilized portfolio totaling 739,000 square feet. All three properties were built in 2019 to modern specs with two of the facilities located in the Bayport North Industrial Park and a third facility close by. We like this area of Houston due to its close proximity to the Port of Houston and the Barber's Cut and Bayport Container Terminals. This portfolio acquisition also complements our two distribution centers located in the Bayport South Business Park. Additionally, we acquired a recently constructed 195,000 square foot stabilized facility in northwest Cincinnati. The property is in a master plan business park right on I-75, where we own an additional 2.4 million square feet of Class A distribution space. Adding to our presence in Central Florida, we purchased a 510,000 square foot shell in Lakeland that we are currently marketing for lease. The property is located at Cross County Line Road from the Lakeland facility we acquired in the first quarter. As Will noted earlier, leasing activity has been positive at that partially stabilized facility, and we have begun to see promising activity at this location. We are working towards a stabilized cash shield forecasted to be approximately 5%. Our two new acquisitions in the Greenville Spartanburg market are both located in the Smith Farms Industrial Park in Greer. One of these facilities has approximately 80,000 square feet of vacancy, providing us the opportunity to fully stabilize the property in a rising rental rate environment. The buildings are located off Highway 101 in Greenville Spartanburg's primary and largest submarket, Spartanburg West, with proximity to I-85, the Greer Inland Port, BMW's largest and most productive manufacturing plant, and the Greenville-Spartanburg International Airport. Additionally, the market's strategic location allows for ease of access to both the Port of Charleston and the Port of Savannah, and is within two hours of the major metropolitan markets of Atlanta and Charlotte. Our conviction about this market is further evidenced by the purchase of a nearby four-property portfolio in Greer that we closed subsequent to quarter end. The approximately 1 million square foot portfolio consists of three stabilized properties and one vacant property. All of the facilities have been built within the last two years, with the vacant facility, the newest of the four, built earlier this year. We have had considerable tenant interest in the space, and are currently responding to several RFPs for full and partial building users. Turning to our development activity, we currently have four active spec deals in progress, and we expect our build-a-suit in the Phoenix sub-market of Goodyear to be completed later this year. As Will highlighted, our 910,000 square foot Atlanta project that reached substantial completion on the base building in the second quarter has seen strong leasing activity with multiple active prospects interested in the full building. Atlanta, as well as the sub-market the facility is located in, continued to post record positive distortion rates. As mentioned on last quarter's call, we commenced development in the second quarter of a 1.1 million square foot facility in the Indianapolis sub-market of Mount Comfort. The project is still expected to reach substantial completion in the second quarter of 2022 at an estimated cost of roughly $60 million. Subsequent to the quarter, we began funding a project in Greenville-Spartanburg. We're excited to further expand our footprint in this market with this 234-acre site that is also located in the Smith Farms Industrial Park. The project will consist of three Class A warehouse distribution facilities, totaling 1.9 million square feet. The facilities will have staggered deliveries over the course of the first half of 2022. The estimated development cost is approximately $133 million. Like our spec projects in Atlanta, Indianapolis, and Central Florida, the Greenville Spartanburg development will feature market-leading specs with respect to clear heights, efficient site plans, truck cork depths, building depths and column spacing, and ample trailer and car parking to meet the demands of a host of logistics users. Our estimated stabilized cash yield and our SPAC projects are projected to be in the low to mid-5% range, which assumes 100% occupancy in payment of our partner promote. We'll continue to provide regular updates on the progress of these projects, With that, I'll turn the call over to Beth to discuss financial results.

Thanks, Brendan. In the second quarter, we generated adjusted company SFO of approximately $52 million, or 18 cents per diluted common share. Revenues were $81.5 million, with property operating expenses of approximately $12 million, of which roughly 86% was attributable to tenant reimbursement. G&A for the quarter was $7.9 million, and we now expect our 2021 G&A to be within a range of $32 to $34 million. Our same-store portfolio was 97.4% leased at quarter end, with our overall same-store NOI increasing 0.9%, which would have been approximately 2.1%, excluding single-tenant vacancy. Industrial same-store NOI increased 1.7%, and would have been 3% excluding single-tenant vacancy. At quarter end, approximately 89% of our industrial portfolio leases had escalation with an average rate of 2.4%. On the capital markets front, during the quarter, we entered into contracts for the sale of 16 million common shares for initial settlement amount of approximately $194 million in a forward equity rate. These shares have not yet settled, and the contracts mature in May 2022. As of June 30th, we had $285 million or 24.6 million common shares of unsettled forward common share sale contracts, including those under our ATM program. Subsequent to the quarter, we redeemed approximately 1.6 million operating partnership units in connection with the disposition of the three properties subsequent to the quarter that Will referenced. This transaction further reduced our non-core holdings and gave us full control of our legacy operating partnership and the flexibility to further simplify our structure. Our balance sheet remains strong with leverage at 4.9 times net debt to adjusted EBITDA at quarter end. At quarter end, we had $125 million outstanding on our unsecured revolving credit facility and currently have $250 million outstanding. Unencumbered NOI remains high at approximately 91%. Our consolidated debt outstanding was approximately $1.5 billion with a weighted average interest rate of approximately 3.1% and a weighted average term of six years. With that, I'll turn the call back over to Will.

Thanks, Beth. I will now turn the call over to the operator who will conduct the question and answer portion of the call.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. The first question is from Elvis Rodriguez of Bank of America. Please go ahead.

Good morning, and thanks for taking the question. Are you able to share some details on how the acquisition pipeline is looking today versus prior quarters and maybe an update on yields?

Sure. The acquisition pipeline with respect to the number of transactions we're working on and dollar value is sort of in the billion dollar area, which is very substantial. um most of the opportunity set that that we see at the moment is is sort of in this kind of three and a half to four and a half area so there's been um you know quite a bit of cap rate compression obviously this year and sort of over the last 12 months uh so we're you know very very happy with the body of work that um you know we've sort of got on on the books for the first seven months of the year um You know, our posture in the acquisition market is, I would say, a little bit cautious. That's not to say that low cap rate transactions don't, you know, sort of work from a mathematical standpoint in the context of total return. Some of that is driven by financing costs. We're probably have 10 year financing costs of two and a quarter. And if you're looking at a high-quality building in a market and location that we really like, if you have below-market rents and conviction that rents may grow for a considerable period of time in the mid-single digits, we all have a little bit of sticker shock about cap rates, but the total return math can still work pretty well.

You bring up a good point on low cap rates today relative to last year. How are you underwriting sort of exit yields today relative to maybe six months ago? And then also, how do you underwrite, so for example, you acquired a vacant asset, like what are you underwriting, 12-month lease up, six-month lease up? What are you underwriting to get to your target yields?

Sure. Brendan, do you want to jump in on that one?

Yeah, sure. Well, in terms of the underwriting and residuals, I guess first I would say that we are long-term holders, so we're very focused on where we see the rental basis and the rental basis going forward. We do do IRR analysis as well. Historically, I would say that I think most of the markets Typically, we add something anywhere 50 basis points to your going in and going out. And today, that's probably more likely something like 25 basis points. But we really focus on a whole host of factors, including basis and rental basis when we evaluate those total returns.

Great. And then just one more for Beth, a maintenance modeling question. So in your supplemental, you added that you're going to receive a 2.6 million lease termination income payment for an office building in Dallas, Fort Worth in January of 22. Just wanted to highlight, I just wanted to bring up, you know, are there any reason or are you going to sell that building before? How should we think about modeling this payment for next year?

So the payment actually occurred in the first quarter. will receive the payment then. So, the termination income for that will be recognized over that year. So, at the end of January, they will be out in 2022. Thank you.

That's very helpful.

The next question is from Anthony Pallone of JP Morgan. Please go ahead.

Okay, thanks. Good morning. I was looking at your three-spec million-square-foot of warehouses in the development pipeline, and you talked about the activity for maybe a full building lease in Atlanta. Can you just talk about just how those were underwritten and the expectation? Was it always for single tenants in each of these properties, long-term leases, multi-tenant? What's the underwriting on those?

This is Brendan. So the base underwriting on all of those projects is with the anticipation of single-tenant users for them. That is, as we approach these spec developments, we look at it from – we kind of start with the demand side. And we have just continued to see over the last couple of years very significant demand for large, modern bulk facilities, and we're building in markets that have very attractive attributes for that kind of use. When we go into designing the building, with all of what I just said, we are very careful to ensure that the building could be multi-tenanted if it needed to be. Typically, as we are marketing these projects, there is often interest from users to take portions of the building and opportunities to divide them. Our preference is to keep them single-tenant. In many cases, I spoke about the demand side, but As we analyze the supply side as well, we often see that our buildings have a very competitive position because of the lack of competing large buildings that could satisfy that tenant need, and that gives us some competitive advantages in negotiating. So our bias is towards holding for single tenancy. Yeah, I think that – did I miss anything of your question, Tony?

No, I think that covers it. I'm just curious, though, then, if you get a single tenant in there, I'm presuming that would be a longer duration lease given the size. Like, where would that market cap rate, do you think, be when you talked about that 3.5 to 4.5 kind of level in the market, then, just trying to get a sense of development spread against the low to mid-fives yield that they outlined?

Yeah, so what we're seeing in our markets is, I mean, the values on those buildings are in those same ranges. So, you know, an asset in Atlanta like our project in Atlanta would be certainly below a floor cap. And Indianapolis at this point is is breaking for, it appears right now, today, and Central Florida as well.

Okay, thanks. And then just my only other question is, I think it was either last quarter, maybe perhaps the one before, you mentioned that the 2022 should really be the earnings trough as you clear out the last of the non-core stuff. You bumped up guidance here a little bit today, and it sounds like your deal activity is pretty good. Do you still think 22 is a trough, or do you think there's prospects of maybe just having some growth next year?

I still view it as a trough. One of the real questions is how quickly some of the development stuff leases up. But right now, I think we would just have a conservative posture until we have some visibility around those outcomes.

Okay, great. Thank you.

Thanks, Tony.

The next question is from Craig Mailman of KeyBank Capital Markets. Please go ahead.

Hey, good morning, everybody. Maybe just a clarification on the 1.6 million OP units redeemed. Were those tied specifically to those assets? Could you just give a little bit more color about the transaction, kind of the mechanics of that?

Sure. Good morning, Craig. It's Beth. um yeah this is a great great transaction for us um you know our operating partnership we had certain limited partners there that had consent rights over certain transactions so the 1.6 million shares uh i mean op units uh represents a about 65 of those op units that we had uh you know everything was consolidated of course and uh with those consent rights although we could structure around those consent rights. Now what we've done is because we've redeemed these units for these three properties, the consent rights are no longer there. So we no longer have to get their consent for any kind of merger or sale of a mass amount of the property. So it'll simplify our structure because we can merge the operating partnership into us. You know, we still have some 1031s that are ongoing, so it's, you know, one of those things that we'll take maybe to the end of 22. But it's not tied, you know, to any particular assets. And, you know, the other positive thing is it will free up our people. It will be less time-consuming. There was a lot of management for it once we merged it in between K-1s, distribution checks, and that sort of thing.

And what, like, should we, this is basically just a stock buyback, right? So what price was it done at?

Well, it was an arm's length. It was arm's length pricing. The three assets had a value of $35 million.

And Craig, that was about a $770 cap rate and included in that league's golf course, just to put it in perspective. So we, overall, we're very happy with the outcome.

Okay. And apologies for the question. I mean, was it 1.6 million in the share count? Or is this kind of a different kind of OP unit?

No, no, it's in our diluted count.

Okay. All right. Then just moving on to the same store. So you guys did 1.7% for kind of the first six quarters, I get, you know, it's 3% if you back out the vacancy, but You're always going to have some vacancy at this point going industrial with the shorter release terms. It seems like the escalators are getting better. You guys are at, what, 2.4% now, and now you're kind of getting 3% on some of these. As you look out longer term, what do you think the growth potential is internally from the industrial portfolio? What would be the target relative to maybe where peers are

Well, I think, Craig, you just have to start with the escalations we have built into our lease structures, right? Close to 90% of our leases have escalators in them. And we've started to, you know, as you've noticed, quarter to quarter now, we're putting up quite good mark-to-market numbers. But I think it's still a tiny bit speculative to sort of forecast where we might land on a quarter-to-quarter basis, right? Talking about same-store rent growth for a quarter or two in advance is sort of an easier thing for us to see. Directionally, everything is going extremely well. You're correct to point out that vacancy has a disproportionate impact on same-store, but given... What the occupancy rate was this quarter, the fact that we were able to land it where we did was a good outcome.

I mean, do you think this could be a 4% to 5% growth portfolio kind of with what you guys are building and the mark-to-market potential embedded in stuff that hasn't rolled yet? Or is this going to be kind of more 3% to 4% grower? I'm just kind of trying to get a sense of Because there's some disparate kind of marks that you guys have in there. You have some bigger assets. You know, like the Mississippi asset, you get a 1.7% rent spread there. But others, you know, you had 7% for this quarter. So I'm just kind of trying to get a sense of where you think this portfolio would fit in to the landscape of the industrial group on a longer-term basis.

Well, we would tend to be more conservative at the moment. You know, part of that just reflects that, you know, the sort of modern warehouse distribution portfolio of ours, which, you know, may represent sort of 60% or so of enterprise value, you know, that's the part of the portfolio that has the best prospects for market rent growth. And on a lot of the new underwriting, I think in the context of 4% or 5% is very sensible. We also have in the portfolio still a portion of assets in manufacturing, light manufacturing, and cold storage, right, which are higher yielding assets and generate a lot of free cash flow, free investment, but, you know, probably, to be fair, have less prospects for, you know, for market rent growth. So it's, you know, really, I think, looking, you have to kind of look sort of deeply into the portfolio just to, appreciate the rent growth dynamics.

That's helpful. Just one more from me, kind of circling back to an earlier question about underwriting, and I totally appreciate the point on a total return basis. With where market rents are going, you could clearly get returns up from kind of the initial going in yields. But when you guys are underwriting, at least right now, given your kind of implied cap rate, What's the more important metric for you? Is it how the assets fit in from an AFFO perspective and your ability to grow earnings? Or is it also looking at NAV and how long it may take to recoup the dilution if your implied cap rate is somewhere in the low to mid fives and you're buying, let's say you start buying in the mid fours.

I think the way we've been looking at it is we've been okay issuing some equity to fund development, where we have both the best opportunity to produce high AFFO and growth, and we're making a good net asset value trade, where upon stabilization, there's a lot of spread compression in what we own. So that's sort of been our thought around equity, and the acquisition side of the business has really been more about, you know, match funding capital, you know, capital recycling from retained cash flow and dispositions. So it's not really one or the other. Craig, you know, both are important to us. Great. Thanks.

The next question is from John Peterson of Jefferies. Please go ahead.

Great, thanks. I just wanted to get a little more color on where cap rates are trending for the office sales that you have left to do. I think in the past, I don't know if it was last quarter or the one before, you guys talked about 12% cap rate on what's remaining, but it seems like you guys are trending more towards the high single digits and some numbers, Will, that you gave on the 11 remaining properties does also seem kind of high single digit range. So just curious if that's like, you know, I guess kind of bridge that gap. Is that conservatism on your part historically or have you seen cap rates compressed in the past few months for those office properties?

I think we've tended to be conservative when we've talked about the overall outcome on the office disposition effort. As the pool gets smaller, We gave a pretty wide range of outcomes just because you have a small pool of assets and the probability of disparate outcomes is higher once that portfolio gets smaller. The midpoint from a cap rate standpoint is around 9%, which is less than the 11-ish area that we've been talking about. So as it gets smaller, in some cases, much better visibility, but also sort of more random outcomes. As that portfolio shrinks, we'll be able to tighten up that gap and whatever the range of outcomes are.

Okay. I don't know if you guys look at it this way, but do you have any sense on your industrial portfolio of what the mark-to-market is on rent?

We do a fair amount of work looking at our rents in relation to market. We don't talk publicly about what we think it is. I think we're quite cautious about trying to talk about mark-to-market beyond 12 or 18 months forward. We're clearly in a position, as I was talking about before, the modern part of our warehouse distribution portfolio There's, I think, very, very strong mark-to-market opportunities, but they're less so in the legacy portfolio. So I think we'd, I guess, rather just continue to produce good outcomes than try to predict so far into the future. In a portfolio that has longer-weighted average lease term, your ability to mark-to-market is less than others. So I think it's in our mind just to be – a little bit cautious and not try to be overly predictive at this point.

Okay. Last question for me on the acquisitions, a couple of them, one of them was vacant. One of them was only partially leased. I'm just kind of curious as you think going forward for your acquisition strategy, like, you know, what percent are you willing to, you know, I guess maybe do more, you know, value add type deals, you know, some stuff with some hair on it versus, you know, more stabilized income streams.

Sure. Brandon, do you want to offer commentary on that?

Yeah, sure. I wouldn't say that we have a debt percentage that we have identified, but rather that we would just look at the opportunities opportunistically where we see them making sense. As we've deepened our concentrations in our target markets, and started the SPEC development projects as well, we're just far more comfortable underwriting lease-up opportunities with vacancy than we had previously. And in this cap rate environment that we're seeing currently for stabilized fully leased assets, the opportunity to buy Shell where you're comfortable with the underwriting can be very compelling.

Great.

Thank you.

Thanks, John.

The next question is from John Misalka of Ladenburg Thalmann. Please go ahead.

Good morning. Hey, John. Maybe kind of sticking with the development pipeline and kind of potential, as you look at potential future development transactions and as you work with your partners, What are you seeing on a kind of price per square foot development cost basis versus earlier this year? Have some of the inflationary pressures on costs stabilized, or are they still putting kind of upward pressure on gross pricing for these types of deals?

I would say that there is continued upward pressure, and there's There's two elements to it. There's both pricing and there's also the availability of the materials. So increased pricing has the potential, of course, to impact your development yields. Fortunately, what we've been seeing across markets is very healthy rent growth, continued rent growth, which has helped offset some of that cost inflation. And then in addition, as we've been discussing on this call, we've also been seeing significant cap rate compression on stabilized assets. So the value is still compelling even with increased cost. With respect to the other element of it the availability of materials. One of the things that we like about our setups with the projects that we're working on is if you're able to secure the materials at a pricing that makes sense for your development underwriting, that puts us ahead of competing supply. So I think a lot of supply will be slowed down in the market. In some cases, it could be a function of pricing, but in others, it would just be a matter of availability of materials, which should allow us to deliver ahead of other competing supply and hopefully at a better basis than those that started later than us.

I mean, I guess as you think about it, because we've been talking about this earlier this year, and it kind of felt like it was the first kind of upward trend, first upward trend. It was certainly an upward trend and kind of input costs for development, that hasn't abated at all kind of maybe since some of these initial spikes in steel and roofing and other kind of input costs?

I would say it's moderated. It hasn't ceased and it's tended to, it's shifted around a little bit. It started with steel and then it's roofing insulation materials and Um, then it's stock package. It's, it's, it's, hasn't been one single item. And so some, some components moderate and even pull back, but, um, overall, um, you know, we, we still see, uh, cost pressures, um, which, which sounds negative, but again, I'll, I'll say that, uh, At the same time, we've seen healthy rent growth, and we think that those dynamics should be helpful for the rental outcomes on our spec projects where we've locked in our pricing and our materials, but also for our existing portfolio where we don't have those basis issues from a competitive standpoint and rent growth.

Understood. I'm going to apologize if I missed this earlier in the call, but it may put in the update maybe on the expectations for kind of tenant improvement and leasing commission spend. You know, it feels like it's kind of, I feel like maybe earlier in the year the expectation was for somewhere, if I'm remembering correctly, you know, $15 million or so of potential spend. It seems like you're coming in pretty much below that. So just any update there would be helpful.

Hey, John. You know, it's a matter of timing, really, as to when projects are getting done. So, you know, we still could come in in the $15 to $25 million range for the year, you know, based on, you know, what we think when things are going to happen. But, you know, sometimes tenants do take longer to do some of the tenant improvements, so it may lapse into next year. But, you know, I'm still forecasting we'll have a heavier second half.

Okay. Understood. And then just one last one on the OP unit transaction, just to kind of make sure I fully understand what was going on there. Essentially, when you purchased those assets, you know, you issued OPs as part of that. So the selling of those assets is just essentially kind of the reversal of those OPs. Like as part of, you know, selling those assets, you basically repurchased the OPs that you had issued originally when you had purchased those properties.

No. No, these were different properties. You know, these OP units are a legacy. They've been in our portfolio for several years. These assets were assets that were purchased at different times along the way. They were just selected to be part of this transaction that made sense for the value of the units that were being redeemed. And they were non-core.

Okay. That's very helpful. Thank you very much. And that's it for me. Thanks John.

Okay. And if you have a question, please press star then one. The next question is from Wendy Ma of Evercore. Please go ahead.

Hi, good morning. Thank you. Thank you for taking my question. So in 2Q you sold one industrial property and we're just curious what's the reason that you sell an industrial asset and also was a key driver that the cap rate for this sale was high. Thank you.

Sure. Yeah, Wendy, just from an age and sort of spec standpoint and location standpoint, that asset really doesn't fit with what we're investing in now. So it was an older facility which had some obsolescence and further obsolescence risk in it. So from the standpoint of looking at it as a sale price per square foot, it was, I think, a really good outcome. But as I said, it just didn't fit with our current investment strategy.

Okay, good. Thank you. And sorry if I missed this before, but the operating for 2Q seems a little bit higher compared to last year and compared to 1Q. So were there any special reasons behind that?

Hi, Wendy. It's really a function of the new leases that we are entering into. A lot of tenants now, we are responsible for the property operating expenses, and then we get reimbursed from them. So it's, you know, in the past we had a lot of net lease deals where the tenants would pay directly for operating expenses and we would just get a check for the rent. Now we're paying for operating expenses and they're reimbursing us. So it's presented as a gross basis on the income statement. So that's the primary driver. Okay. Thank you.

That's my question. The next question is a follow-up from Alvis Rodriguez of Bank of America. Please go ahead.

Just a couple quick more for me. So on the legacy portfolio, the industrial assets, how much of the 94% would you categorize as legacy? Just trying to get an understanding of where the industrial portfolio sits today relative to the legacy assets.

Yeah. I mean, the cold storage manufacturing and light manufacturing is all legacy. That's, I think, about 19% or so. And then in the warehouse distribution portfolio, there's some things that we would characterize as legacy as well. So maybe thinking in the context of 25% to 30% of the portfolio being sort of older vintage added to the portfolio over five years ago.

And should we consider these assets could be potential sort of funding source for, you know, newer acquisitions and developments going forward?

We would view the cold storage manufacturing and light manufacturing as, as a source of liquidity and an alternative to capital markets from, from that standpoint. You know, the legacy warehouse and distribution, not, not necessarily. You know, we, we, Like the buildings a lot, they just have a little bit different characteristics and would be a little bit more high yielding and maybe with a little bit less rent growth than things that we're adding to the portfolio now. There's a handful of cases where we have buildings sort of outside of our regional market footprint that we might look at as opportunities to turn those into liquidity right in the context of how we're shaping the portfolio longer term. But I don't think that that would be a heavy amount of disposition activity in terms of aggregate dollars.

Great. And then just one more for Beth. Are you able to share how you plan to deploy the forward equity? Obviously, the line of credit increased from quarter end. And just trying to get an understanding of how you plan to deploy that equity throughout the year. Thanks.

Sure. So the contracts that we have on a forward basis, they're good for a year. So, you know, when we look at that, we'll be funding our development as we go along. So the first tranche will be coming due this August in a few weeks. So we'll be bringing those shares in at that point. But the lion's share of it is good until out to May of 2022. And, you know, when you think about it, you know, when you're borrowing on the line, our line right now is one month live worth 90 basis points, which is It's really attractive financing right now, whereas if you're bringing in the share count into earnings, you're diluting earnings. So it's a balancing act, really.

That makes sense. And can you remind us how many shares will you be deploying in August?

Thanks. Sure. So in August, it's the first tranche, and that's about 3.6 million.

Thank you so much.

This concludes our question and answer session. I would like to turn the conference back over to Will Eglin for closing remarks.

We appreciate everyone joining us this morning. Please visit our website or contact Heather Gentry if you would like to receive our quarterly materials. In addition, as always, we hope you'll feel free to reach out to any one of us in our senior management team with any questions. Thanks again for joining us and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.