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Operator
Good day and welcome to the Plymouth Industrial REIT second quarter 2023 earnings conference call. Today, all participants will be in a listen-only mode. Should you need any assistance during today's call, please signal for 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. If you would like to withdraw your question at any time, please press star then two. Please note that today's event is being recorded. At this time, I would like to turn the conference over to Trip Sullivan of Investor Relations. Please go ahead, sir.
Trip Sullivan
Thank you. Good morning. Welcome to the Plymouth Industrial Reit conference call to review the company's results for the second quarter of 2023. On the call today will be Jeff Witherall, Chairman and Chief Executive Officer, Anthony Saladino, Executive Vice President and Chief Financial Officer, Jim Connolly, Executive Vice President of Asset Management, and Ann Hayward, General Counsel. Our results were released this morning in our earnings press release, which can be found on the Investor Relations section of our website, along with our Form 10-Q and supplemental files with the SEC. A replay of this call will be available shortly after the conclusion of the call through August 10, 2023. The numbers to access the replay are provided in the earnings press release. For those who listened to the replay of this call, we remind you that the remarks made herein are as of today, August 3, 2023, and will not be updated subsequent to this call. During this call, certain comments and statements we make may be deemed forward-looking statements within the meaning prescribed by the securities laws, including statements related to the future performance of our portfolio, our pipeline of potential acquisitions and other investments, future dividends, and financing activities. All forward-looking statements represent some judgment as of the date of this conference call and are subject to risk and uncertainties that can cause actual results to differ materially from our current expectations. Investors are urged to carefully review various disclosures made by the company, including the risk and other information disclosed in the company's filings with the SEC. We also will discuss certain non-GAAP measures, including but not limited to core FFO, AFFO, and adjusted EBITDA. Definitions of these non-GAAP measures and reconciliations to the most comparable GAAP measures are included in our filings with the SEC. I'll now turn the call over to Jeff Witherow. Please go ahead.
Jeff Witherall
Thanks, Tripp. Good morning, everyone, and thank you for joining us today. We are more than halfway through the year, and our team continues to execute across the objectives we outlined for 2023. Fundamentals continue to be strong with positive absorption, better than expected leasing volumes and rent increases, along with market rent growth. Achieving our objectives through the balance of the year will position us for even better growth in 2024. Let's turn to growth first. Our organic growth is right on track with a 6% increase in cash same-store NOI this quarter and a 7.5% increase through the first half of the year. Occupancy in the same-store pool is still around 99%, and our portfolio continues to be among the top performers in the sector. Leasing results demonstrate the attention we are providing the portfolio, as well as the strong fundamentals in our specific markets. We have addressed 88% of our 2023 expirations and 24% of our 2024 expirations. Both are at a pace in rent increase ahead of where we were this time a year ago. We saw a 19.3% increase in rental rates on a cash basis for the quarter, and through July 31st, we have achieved a 23.1% increase on leases commencing in the second half of the year. That's in line with our commentary last quarter that we might be trending ahead of the 18% to 20% portfolio mark-to-market we have previously estimated. In our development program, we have three more projects left to deliver by year-end. The two buildings in Jacksonville are fully leased with deliveries in Q3 and Q4, and our second Atlanta project is coming online in Q3. We still have work to do on leasing up this Atlanta building and the one in Cincinnati that was delivered in Q2. Both of these properties are well located, and I'm confident we'll get these leased up within underwriting. Across the entire $61 million that we have in our development program, we're expecting initial returns in the range of 79%. Based on the success of this program, we will continue to explore additional opportunities if the returns meet our threshold and we have a clear line of sight on pre-leasing. other major initiative is to continue improving our capital structure. We have now lowered our net debt plus preferred metric for five straight quarters and on a path to get to 7x by year end and further delevering in 2024. While leasing up our new developments are part of this equation, another big piece is the elimination of our 7.5% Series A preferred stock. We announced last night that we will redeem the $49 million that's still outstanding. Anthony will get into more of the details later, but I want to highlight two of the main sources of capital for this redemption. First, we activated the ATM program during the quarter and for part of July and executed at prices that, in combination with sale proceeds from the sale of a property anticipated to occur within the next 60 days, will allow us to eliminate the secured debt on that property and redeploy the proceeds toward the Series A redemption on an accretive basis. I've talked about this before, and it bears repeating now. We have a handful of properties that we would sell for real estate reasons, meaning it makes more sense to be owned by a user and or it's a property where we might have little to no scale in that market as opposed to a strategy of capital recycling. This potential disposition fits that description perfectly. I want to thank a couple of people who have made big contributions to Plymouth over the years. First, I'd like to thank Martin Barber, who many of you know from his decades of experience in the REIT sector. He retired from our board, effective with June's annual meeting, after many years of service to Plymouth and its shareholders. Second, I'd like to recognize Penn White, who co-founded Plymouth with me and retired from his positions as president and CIO last month. He'll continue to serve on the board of directors, as well as advise the company on acquisitions and strategy. We're fortunate to have benefited over the years from Penn's contributions, as well as the investment team he helped put in place. We have a deep, experienced team at Plymouth, and that gave us the luxury of not having to backfill those roles. Before I turn it over to Jim, I'd like to highlight that last month we published our first ESG report. We are proud of the effort our team went through to document all of the different activities, initiatives, and investments we've made throughout our company and our portfolio. You can find it on the dedicated ESG page on our website. Jim, why don't you provide some color on the leasing activity? Thanks, Jeff. Good morning.
Anthony
I want to first touch on the leases we previously signed that commenced during the second quarter. We had a 19.3% rental rate increase on a cash basis on leases commencing in Q2. That's on an aggregate basis. You'll note from the release in the supplemental that the new leases experienced a 36% increase, while renewal leases experienced an 11.2% increase. We had a 75% renewal rate during the quarter. Of the leases that were renewed, 21% were associated with contractual rent increases, which impacts the overall renewal rate increase. Through the first half of the year, of the leases that were renewed, 14.2% of the renewals were contractual increases. While during current market conditions, fixed-rate renewals tend to have lower rental rate increases than market renewals, they do potentially increase renewal probability and usually have lower leasing costs. In many cases, there are no commissions or tenant improvements. Related to the development program, in Georgia, we have agreed to terms on a 72,000-square-foot lease in our 180,000-square-foot facility with active tenants pursuing the balance. In Cincinnati, we have closed on numerous deals with full and partial building users. We have addressed over 88% of the total square footage scheduled to expire in 2023. When we add up all these leases signed and commencing in 2023, we will experience an aggregate increase of 20.3% on a cash basis. The lease renewal rate so far for 2023 leasing is 67%. With total portfolio occupancy at 98%, in the same store occupancy at 98.9%, both of which are essentially flat from Q1, we continue to benefit from strong leasing activity, with rental rates still accelerating at a record pace. Turning to 2024, we have already leased over 24% of the initial 2024 expirations. We will experience an aggregate 14.6% increase on a cash basis on these rents. 8.7% for renewals and 43.7% for new tenants. This rental increase compares favorably to this time last year when our earliest batch of 2023 leases were up 11.1% on a blended basis. The renewal percentage for these transactions was 79% with 53% of the renewal leases associated with contractual renewals. Consistent with nearly every quarter since the pandemic, we have collected over 99% of our rents billed during Q2, and there are currently no active rent to parole agreements. At this point, I'll turn it over to Anthony to discuss our financial results.
Anthony
Thank you, Jim. The second quarter unfolded as we projected, and we have exited the quarter with a slightly more accelerated timeline on delevering. Before we get into that, let's walk through some of the key metrics. As we know, last quarter, we anticipated a Q2 same-store NOI below the full-year trend line, with the second half of the year trending back up. This was only a timing of expected spend associated with scheduled repairs and maintenance occurring mid-year, coupled with the impact of real estate tax assessments that will be substantially recovered by year-end. With the 6% cash same-store NOI increase this quarter, we are at 7.5% through the first half of the year. That's right at the midpoint of our same-store NOI guidance. G&A for the quarter was down year-over-year on an absolute basis and down 210 basis points as a percentage of revenues, primarily due to the timing of certain professional fees and other expenses. The main drivers of the year-over-year increase in interest expense are the increase on the borrowings of our revolver associated with completing our development program, and the approximately 400 basis point increase in SOFR year-over-year. The revolver is our only debt that is not hedged or fixed, and our only contemplated use of the revolver at this time is to fund the Jacksonville development buildings. As noted in the release, we have funded 87% of the $23.9 million of the development program that remains, which includes the two pre-leased Jacksonville buildings and the second Atlanta building that are all delivering in the second half of the year. The weighted average share and unit count was up year over year, with a full quarter of the higher share count from the conversion of Madison's remaining shares of the Series B in two tranches last year. The utilization of the ATM that Jeff mentioned earlier will have a prospective impact on the weighted average share count in the second half of the year, the impact of which will be more than offset by the accretive execution of the Series A redemption. Turning to our balance sheet, we ended Q2 with net debt to adjusted EBITDA at 7.06 times and net debt plus preferred to adjusted EBITDA at 7.45 times, our fifth consecutive quarter of de-levering. One of the big opportunities to continue improving the balance sheet that we've talked about for some time is the elimination of our Series A preferred stock. As you saw last night, we announced the redemption of 7.5% Series A at par, or $25 per share. It will be redeemed on September 6th with a final dividend paid at that time. After that point, the shares will no longer be deemed outstanding and will delist from the exchange. We have $48.8 million of the security outstanding, and we intend to utilize the $27 million of ATM proceeds raised in Q2 and to date in Q3 to along with expected proceeds from sale of a property that should close in the third quarter. The redemption of the Series A is a significant delevering event that, upon execution, is expected to be accretive to core FFO and brings us closer to sustaining below seven times, while creating strategic capacity as we evaluate internal and external growth opportunities. As of June 30, 95% of our debt carried a fixed rate or was fixed through interest rate swaps, with a total weighted average cost of debt of 3.96%, with 58% of total debt on an unsecured basis. Our liquidity position remains strong, as presently we have $12.4 million of cash on hand, plus an additional $6.7 million in operating escrows. and $287.5 million of capacity on the revolving line of credit. The November maturity of the AIG loan for $110 million is our next opportunity to ladder debt maturities, and we will provide a substantive update on the execution next quarter. Based on the first half results, we once again affirmed our core FFO guidance for the year. We made a slight change in the net loss range to reflect additional depreciation amortization and interest expense, and a shift in the timing of the lease up on the remaining Phase 1 development buildings. As I've said all year, we don't have much variability in our ranges this year. With the stability and growth in our same store pool, the rental rate increases, and the volume of leasing we continue to accomplish, and few variables that remain which would govern the high and low end of the ranges. Operator, we are now ready to take questions.
Operator
Thank you. We will now begin the question and answer session. As a reminder, to ask a question, you may press star, then 1 on your touch-tone phone. If you're using your speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star, then 2. In the interest of time, please limit yourself to a question and a follow-up. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Todd Thomas with KeyBank Capital Markets. Please proceed.
Todd Thomas
Hi, thanks. Good morning. First question, I was just wondering if you could talk a little bit more about your plans to permanently finance the remaining $21 million of preferred redemption. It sounds like you have a disposition teed up. Can you just provide a little bit more detail on the expected proceeds that you expect to generate and maybe bookend sort of the pricing on that asset sale? Sure.
Jeff Witherall
Hey, Todd. Thanks for the question. Yeah, we're not getting into a lot of detail on that asset sale. It is a contract, still subject to some final diligence, so we're not identifying it or kind of getting into that. We did put basically the proceeds, almost $20 million. We have talked about in the past, we have a handful of assets. We have another one that's under LOI for sale. Um, and we're selling these for pretty much real season. So we're not selling these ads just to pay off the series. Hey, um, so we're working on it. Um, you know, Okay.
Todd Thomas
Um, And should we assume – I know deleveraging was an important initiative beyond the Series A redemption. Should we assume additional equity issuance is on the table to the extent that the stock remains in sort of a similar range to where it's trading to where you issued in the second quarter and through July?
Jeff Witherall
I think the easy answer is yes, but remember, anything we issue needs to be secretive. And so when you put the equity in line with paying off the Series A, couple that with the disposition, it's basically secretive to the FO. And so that's what we're focused on. So we're not going to issue secretive equity. We're going to issue equity that's secretive.
Todd Thomas
Okay, got it. And then just one question around... occupancy and the guidance. You know, you ended June, you ended the quarter at 98.9%. You know, you maintained the 98.4 to 98.8 range for guidance. Can you just talk about the trajectory of occupancy from here, you know, in that range? And if there are any, you know, known move outs or anything specific that you can sort of point to as you look out towards the second half of the year?
Anthony
During the second half of the year, the game store occupancy was pretty much flat. On the overall portfolio, our operating plan for the entire year was to flow between 97% and 99%, which we've done all the way through. We do have one move out of 50,000 feet, Michael's in Atlanta, but that was in the budget to be vacant for the entire year, and we have a lease that we're negotiating that is going to be either 9-1 or 10-1. So we're going to be on that for sure. Other than that, there's really minimal turnover for the rest of the year.
Todd Thomas
Okay. All right. Thank you.
Operator
Our next question comes from John Kim with BMO Capital Markets. Please proceed.
John Kim
Hey, good morning. I think the connection is not great, so we couldn't hear some of the answers just provided to Todd's question. But I wanted to ask about the preferred, redeeming that. Your stock is up 18% year-to-date. You know, it's prudent to reduce leverage. But, Jeff, I think you indicated before at NAIRIT that you thought raising equity in the $25 to $27 range would be appropriate. It looks like today you're more comfortable raising a little below that. Just wanted to ask how you got there.
Jeff Witherall
So, can you hear me, John? It's a little bit choppy, so we can hear, like, every other word, but... Okay. We test early on when we got on the call and it worked. So, I apologize for that. Yeah. Todd's question was that. And as I said, we've been very consistent. We were not going to have dilutive equity. So, we took advantage of the ATF to raise capital to receive the Series A. So, remember that's a staff coupon. So, that disposition as we have it out in the remarks, um, what was just done was a creative FFO. So I wouldn't, I wouldn't draw any conclusions that were, were happy to put it at this price. Um, it's really, it's really going to be deal with effect. If it's a creative FFO, they'll issue equity. If it's dilutive, we won't do it. Okay.
Trip Sullivan
Got it.
John Kim
Um, in, In his prayer remarks, Jim mentioned the difference, again, that you had between new and renewal spreads, and renewal options having an impact on that. I think last quarter, you guys had mentioned that 10% of the remaining expiring regions had that renewal option. So going forward, should we expect that gap to narrow?
Anthony
As it relates to fixed-rate renewals, the component of fixed-rate renewals in the portfolio will bleed out over the next two or so years. And just remember, John, this is not dissimilar from the blended results that we accomplished as we were addressing 23 aspirations. We're about 400 bps ahead relative to last year's performance and are confident we're on the track to achieve a blended cash yield at or in excess of 20% on 24 expirations.
John Kim
Okay, great. We'll follow up with other questions, and congrats for the time. Thank you.
Operator
The next question comes from Nick Philman with Baird. Please proceed.
Nick Philman
Hey, good morning. Maybe following up a little bit on the renewal, 52% of renewal activity was fixed renewals. I guess what percentage of the stuff that's remaining in 2024 has that fixed renewal option embedded in it? 2024 of the year,
Anthony
The total is about 8% left. This is a phenomenon that happens every year. So our numbers are always low looking at the forward year because the fixed renewals come in sooner. And as we move into the year, we start filling up with new leases and market rate renewals, and that's how the rate goes from 14% up to 20%.
Nick Philman
Okay, that's helpful. And then maybe there's been a decent amount of comments on like bigger box demand being a little softer. Your three largest tenants have spaces over 500,000 square feet expiring in St. Louis through 2025. Maybe could you provide a little commentary on that specific market and those spaces and then maybe early indications for FedEx in 2024? Thanks. Those properties are quite low.
Anthony
World Canyon is in one of the properties, and it's the guilds with food. FedEx is, they suck a lot of money out of the building. They at least expire at 731. They have two renewal options and a notification period in February. So we haven't heard from them what their intentions are, but they will go to the building. It's quite speedy, and we certainly expect to know. That's helpful. Thanks.
Operator
As a reminder, if you do have a question, please press star then 1 on your touchtone phone. Hello, the next question comes from Nikita Belli with J.P. Morgan. Please proceed.
Nikita Belli
Hey, guys. Good morning. Can you talk a little bit about the pipeline for additional development starts, maybe what your yield expectation on the new deals would be? And also, any collateral on potential acquisitions given the market environment? Anything would be appreciated.
Jeff Witherall
Yes. So we do have a significant amount of land. It's available for development. I think we've talked in the past where we've outlined we have additional capacity in Jacksonville, additional capacity in Charlotte, also in Cincinnati. And until we have a clear line of sight on leasing, We're probably not going to start any more new development. We're going to finish up what we're having and get at least out. That said, we do have several prospects out there looking for a deal to suit. So if those come to fruition, we will build those. Those yields will be, like you said, between 7% and 9%. I think we're achieving between 8% and 9%. And those development yields are creative and very attractive for us. On acquisitions, we continue to have a very rough pipeline. The market is still bifurcated, where we're seeing multiple offers on some properties, limited offers on others. We're still seeing deals straight to finance, and cap rates are somewhat spread out for a fairly wide range. And I think we're in agreement with several of the large houses. I know CBRE came out. We don't really see any clarity on cap rates until the end of the year, and that's being driven by the cost of debt that continues to go up.
Nikita Belli
Two more questions. Anthony, you mentioned the $110 million G loan that matures. So what's the plan? After that, when it matures, how are you going to take it out? What's the go forward on that one? And the last one is just wanted to hear the overall tone from the tenants. Like, what have you heard from the tenants? Now, we've heard that some folks are taking longer to sign leases. The decision-making process is a little slower. The business is slow. not 10 out of 10 anymore. It's just good. It's great, but it's not 2020, 2021. Just overall color, the conversations that you're having with tenants, like what are they telling you?
Anthony
Why don't we start with tenant reception with Jim, and then I'll follow up with a response to your question on ASG.
Anthony
Like I said in the past, the tenant's this year have taken a little longer to sign the leases. I think they just want to see how the general of the economy and how it's going. It's not really indicative of their businesses. They're all still doing well. The businesses are doing great. It's just a matter of, you know, is there going to be a recession? There's not going to be a recession. So they're holding off to the latest moment to sign a lease. We're still getting health and rent increases. It's just that they're agreeing to them. They understand that, you know, the rent has gone up, but it's taking a little longer to make sure that... Any macro issues are just before they sign.
Anthony
And then it relates to AIG. The base case addressing that maturity to utilize some of the capacity on the line until we turned it out or originated an alternative instrument with a five, seven-year time. As Jeff mentioned, interest rates continue to rise and will likely stay elevated for longer. And our sensitivity to pricing led us to widen our options, including exploring to rectify the incumbent lender and other liabilities. The line currently is 6.9%. Short-term bank debt is around 7%. Private investment market was stable. is not overly receptive to inaugural issuers at this time, and the convertible debt market, which has seen a recent uptick in activity, remains opaque in terms of an option for us. So on a relative basis, Lifeco's are offering really compelling terms, starting at the low to mid-5s, depending on the TV and term. We've received actionable alternatives from not only our banking partners, But we look forward to providing some kind of update on it.
Operator
Thank you. Thank you. The next question comes from Anthony Howell with SunTrust. Please proceed.
Anthony Howell
Good morning, guys. Thanks for taking my question. Maybe I missed this, but Anthony, can you talk about what drove the 11% same-store expense growth this quarter?
Anthony
Anthony, a lot of timing of spend more than anything. I think we mentioned in Q2 we saw a bit of a pop. And we always anticipated this kind of ramp to Q4. So we're at the point today, if you will, at 7.5%. We anticipate that spend recovery will normalize the balance of the year to get us at or maybe even slightly above the midpoint.
Anthony Howell
Okay. And for 2024 leasing, if we exclude the renewal options, what would the renewal lease spread be?
Anthony
That would be 23.6%.
Anthony
Okay. Thanks, guys.
Anthony
Thank you.
Operator
The next question comes from Mitch Germain with JMP Securities. Please proceed. Hello, sir. Your line is live.
Memphis
Sorry about that. Nice quarter. Jeff, I know I ask you this every couple quarters, but just curious in terms of your willingness to entertain a joint venture discussion or another joint venture discussion. Clearly, now that you've cleaned up the capital stack, is that something that is still under discussion? Sure, Mitch.
Jeff Witherall
It is. I keep thinking back to the Memphis transaction that we did several years ago where we were able to buy a $75 million portfolio. And we bought it with money because it was about $7 or $8 million cap back, leasing commission, that we could just not take on our balance sheet. I mean, it would just affect our numbers each quarter. And so we did it as a JVC. We bought it back last year. And that portfolio is performing exceptionally well. And so I thought that's a win-win. And so we'll continue to do that. And we're doing that because we believe we're adding value to the shareholders, you know, as I said at the time. You know, everybody that's in this room is a substantial shareholder on this call. And so we're not going to do anything silly to dilute ourselves. So as we do these AVs, we're building a build of value. And that's the entry point. If it's going to add value, we're going to do it. And I think it's a great compliment for us. And so we actively have discussions. We'll come across the people, and there's people that don't fit the REIT, and if they fit into the REIT in our markets, we're picking up the property management fees, the asset management fees when we do that. So I think we think it's a great business. So we will continue to explore that.
Memphis
That's helpful. Now that your development exposure is thinning out a little and industrial fundamentals are still, you know, kind of extending this run to the positive, is there any desire to maybe look toward, you know, executing on some of your land positions? Or is it going to take some either pre-lease or significant interest to, move forward on a new project?
Jeff Witherall
Yes, the lab. As I think we are in active discussions on build-to-suit that we speak on our own. So I think that's where we're going to focus our attention, not on spec development. Got you. Thank you so much. Great quarter. Thank you.
Operator
At this time, we are showing no further questioners in the queue, and this does conclude the question and answer session. I would now like to turn the conference over to Mr. Jeff Witherow for any closing remarks.
Jeff Witherall
Thank you for joining us this morning. As always, we are available for follow-up questions. Thanks again.
Operator
The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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