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Operator
Hello and welcome to the Plymouth Industrial REIT third quarter 2023 earnings call. 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 telephone keypad. 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 Trip Sullivan of SCR. Please go ahead.
Trip Sullivan
Thank you. Good morning. Welcome to the Plymouth Industrial Reef Conference call to review the company's results for the third quarter of 2023. On the call today will be Jeff Witherill, 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 10Q and supplemental filed with the SEC. A replay of this call will be available shortly after the conclusion of the call through November 9th, 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, November 2nd, 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 law, including statements related to the future performance of our portfolio, potential acquisitions, dispositions, and other investments future dividends, and financing activities. All forward-looking statements represent Plymouth's judgment as of the date of this conference call and are subject to risks 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 balance with the SEC. We will also 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 SEC. And now I'll turn the call over to Jeff Witherow. Please go ahead.
Jeff Witherill
Thanks, Tripp. Good morning, everyone, and thank you for joining us today. Our third quarter operating metrics reinforce my belief that our properties located within the golden triangle are well positioned to capture the demand from a broad array of users. We experienced a 24.1% increase in rents on a cash basis for the quarter and expect to be higher than 20% for all leases commencing in 2023. That's at the high end of our 18 to 20% mark to market. We've also addressed our over 93% of our 2023 expirations and have made a lot of progress on 2024 expirations. Organic growth remains on track as well with a 6.8% increase on a cash basis through the first three quarters of the year in same store occupancy of 98.6%. In the Golden Triangle markets, we're seeing positive space absorption, continued market rent growth, and favorable supply demand environment for our type and size of space. We expect to roll out a new white paper on the Golden Triangle ahead of NA REIT this month, but we have continued to see further investment in these markets that indicates there should be a substantial demand associated with the onshoring and nanshoring for many years to come. We believe we continue to be in the right markets at a low per square foot basis and able to provide attractive space to tenants that need greater access to these markets or might operate with more of a focus on margin. In our development program, we delivered two projects during the quarter. The first is our second building in Atlanta, which has a new lease for 72,000 square feet that commenced in September. We have proposals under consideration for the balance of the space. The other building is in Jacksonville, where we have a single tenant fully leased that also commenced in September. Our final building in our Phase I development program is under construction in Jacksonville. It is fully leased and expected to deliver in mid-2024. As we've noted before, tenants are taking a little more time to make decisions on this new space, but we essentially have two spaces left to lease in the new developments, and we have active proposals under consideration for both. Improving our capital structure through disciplined capital allocation has been a major initiative for us. We demonstrated our commitment to this improvement during the quarter with the elimination of the Series A preferred stock, strategic execution of the ATM program at prices close to our NAB, and the disposition of an industrial building in Chicago for a substantial gain. As a result of these decisions, we lowered our net debt plus preferred metric for the sixth straight quarter. At 6.7 times as of quarter end, we exceeded our year-end goal of seven times ahead of schedule we are on a path to further gradual de-levering in 2024. Yesterday, we also took care of our largest debt maturity with the payoff of the AIG loan. I'll let Anthony get into the details, but I do want to call out that our initiatives to swap our debt at the beginning of the year have put us in a good position. I want to focus on the September disposition for a moment. We had previously identified several properties that could be potential disposition candidates for real estate decisions. One of these factors was if it made more sense for an owner-user, and that was the case with 6510 West 73rd Street in Chicago. We sold that property for $19.9 million, which was a price of $65 per square foot, yielding a 4.9% cap rate on in-place NOI and an IRR of 31.1% over a six-year hold. After paying off a mortgage on the property, we had nearly $14 million in net proceeds to combine with the ATM proceeds to eliminate the Series A preferred. We have another disposition that is under contract to sell by year-end for $16.8 million. This property is our only asset in New Jersey and should result in another gain on sale. This expected sale provides additional proceeds for debt repayment and or acquisitions and eliminates a market where we did not have any scale, another factor we'd previously identified. We will continue to evaluate buildings that, for real estate reasons, we no longer desire to hold. For what remains of 2023, you can expect us to be laser-focused on getting our remaining spaces leased in the development program and taking advantage of the leasing opportunities ahead of us in the existing portfolio. We will also continue to take a hard look at how we might apply any proceeds from additional dispositions to reduce debt and or fund acquisitions on an accretive basis and set us up for a successful 2024. Jim, why don't you provide some color on the leasing activity?
Anthony
Thanks, Jeff. Good morning. I want to first touch on the leases we previously signed that commenced during the third quarter. We had a 24.1% rental rate increased on a cash basis on leases commencing in Q3 on an aggregate basis. You'll note from the release in the supplemental that the new leases experienced a 25.9% increase, while renewal leases experienced a 23.6% increase. We experienced a 68% renewal rate during the quarter. Of the leases that were renewed, 9% were associated with contractual rent increases, which impact the overall renewal rate increase. Related to the development program, in Georgia we executed a five-year 72,000 square foot lease and 180,000 square foot facility with active tenants pursuing the balance. In Cincinnati, we executed the five-year lease for 47,000 square feet and our 155,000 square foot facility and our close and other deals to fill the balance of the space. Both executed leases commenced during Q3 and For all the remaining 215,000 square feet of space yet to be leased in our development program, we have active proposals under consideration. Year to date, we have addressed over 93.5% of the total square footage scheduled to expire in 2023. When we add up all the leases commencing in 2023, we will experience an aggregate increase of 20.1% on a cash basis. The lease renewal rate so far for 2023 Leasing is 67.5%. Through the first three quarters of the year of the leases that were renewed, 12.5% of the renewals were contractual increases. With total portfolio occupancy at 97.6% and same store occupancy at 98.6%, both of which are down slightly from Q2, but through October, occupancy is back up to 98% for the entire portfolio and has remained at 98.6% for the same store. As you can see, we continue to benefit from strong leasing activity with rental rates still accelerating and occupancy outperforming the national average of 95.6%. Turning to 2024, we have already leased over 34% of the initial 2024 expirations. We will experience an aggregate 14.3% increase on a cash basis on these rents. 13.9% for renewals and 31.8% for new tenants. This rental increase compares favorably to this time last year when our earliest batch of 2023 leases were up 10.3% on a blended basis. The renewal percentage for these transactions was 74%, with 43% of the renewal leases associated with contractual renewals. Rent spreads for 2024 are expected to be similar to 2023, with strong market rent growth projected for our markets. Consistent with nearly every quarter since the pandemic, we have collected over 99% of our rents billed during Q3, and there are currently no active rent deferral agreements. At this point, I'll turn it over to Anthony to discuss the financial results.
Jeff
Thanks, Jim. The third quarter saw a core FFO at 46 cents per share, driven by sequential improvement in leasing spreads contributions from our phase one developments, namely Jacksonville and Atlanta, slightly lower than anticipated interest expense, coupled with lower professional fees and corporate operating expenses. As Jeff mentioned, the path to sustaining sub-seven times net debt to annualized adjusted EBITDA has accelerated due to our strategic use of the ATM and an asset divestiture to redeem the Series A and repay a portion of the outstanding line balance. Our net debt and net debt plus preferred metrics have now converged as the Series A was the last of our preferred instruments to be addressed on our balance sheet. We ended the third quarter with net debt to adjusted EBITDA at 6.7 times, our sixth consecutive quarter of delevering. As of the same period ended, 93% of our debt carried a fixed rate or was fixed through interest rate swaps with a total weighted average cost of debt of 4.01%, with 58% of the total debt on an unsecured basis. Subsequent to quarter end, we made another major improvement to the balance sheet with the payoff of the AIG loan, our largest secured debt principal amount representing approximately 12% of our total debt outstanding. On November 1st, we repaid the AIG loan in full, which was $106.9 million after the release of lender escrows. After carefully reviewing numerous options for repaying this loan throughout the year, and with an eye to how we can best position us for an investment-grade balance sheet, we decided to use our unsecured credit facility for the proceeds. We anticipate executing an interest rate swap in the very near future on approximately $100 million of notional value across three counterparties that will have a tenor matching the remaining term on our facility maturing in August 2025. By going this route, we have preserved optionality while mitigating our exposure to variable rate, improved our debt on an unsecured basis from 58% to 70% of total debt outstanding, and eliminated all but 19 million of debt maturities until August 2025. Further, we will have the flexibility to pay off tranches of this facility with potential disposition proceeds instead of locking in higher interest rates over the next five to seven years. We achieved same-store cash NOI growth of 5.4% for the quarter and 6.8% year-to-date. During the third quarter, we did see operating expense pressure, primarily due to higher real estate taxes and annual maintenance expenses coming in higher than expected. the majority of which we anticipate recovering as a part of the end-of-year expense reconciliations. We once again affirmed core FFO guidance for the year and have held constant our same store NOI range as we anticipate recoveries to adjust to the incremental operating expenses incurred, aided by no notable dip in occupancy for the balance of the year. Our full year range for interest expense remains unchanged. However, G&A expectations for the year have been decreased to a range of $14.2 million to $14.6 million. Operator, we're now ready to take questions.
Operator
Thank you very much. Our first question comes from Todd Thomas with KeyBank Capital Markets. Please go ahead.
Todd Thomas
Hi, thanks. Good morning. I just wanted to touch on the development leasing and just see if you could provide a little bit more detail around tenant demand and the potential timeline to continue to get some leasing done, you know, particularly at Fisher Park 1 and New Calhoun 2.
Anthony
Yes, this is Jim. In Cincinnati, you know, we're close with two potential candidates and expect some movement in the next couple of weeks. Multi-tenanting the building has opened up a wider range of opportunities there. In Georgia, we are very close on a lease with a food manufacturer of blended food products. We've been working with Georgia Power to address power supply issues, which are getting resolved and we expect to have a lease shortly.
Todd Thomas
Okay, and then how should we think about new starts moving forward from here? Is there anything that you're contemplating anything that might hit before year end or in early 2024?
Jeff Witherill
Todd, this is Jeff. As in the prepared remarks, our phase one development program is basically finished. We have one building under construction in Jacksonville that's leased. That'll be delivered early 2024. We're not going to take on any more spec development. However, we do have in Cincinnati 200,000 square feet We are talking to a potential built-to-suit, so those would be the only things that we would ever start probably in the next 12 to 14 months. We're going to strictly be looking at built-to-suits. We have four or five sites where we could build on, and so that's our focus.
Todd Thomas
Okay. And then, Anthony, you commented on the balance sheet and overall leverage, which came in quite a bit, as you mentioned. So you're below the seven times threshold. What's the next target in terms of leverage, and where do you expect to be over the next few quarters after the disposition and the additional lease up in the development pipeline?
Jeff
Yeah, thanks, Todd. We've said early on our target is to be sustaining between five and seven times. We have made significant inroads and, as you mentioned, came in under our seven times target. There is certainly an opportunity as development stabilizes in 24 for another half turn down. So our next kind of target, if you will, would be sustaining around six and a half times and maybe just under that.
Operator
The next question comes from Nick Pillman with Baird. Please go ahead.
Nick Pillman
Hey, good morning, guys. Maybe a question for Jeff or Jim. Just on 2024 leasing, you've gotten 2.2 million square feet done. Just some of the larger known expirations, FedEx, communication, test design, are any of those addressed in what you've done so far, or maybe get a color on those two individual leases?
Anthony
Yeah. I mean, the larger space that's coming up next year, of course, you know, FedEx, which has a renewal notification date of 1-31 of next year. We've begun our engagement with them on potential renewal, and we expect to hear a definitive answer after the end of the year. We're working with Visible Supply, which is Maersk. That building is quite full. The operations are strong there. We expect to have renewal in that space. That's 330,000 square feet. Silver Line is a known move out, and we're working on marketing that space. We've got six to eight potential prospects of various sizes, and we're trying to see how we would fit them in the space. Also, the neighboring tenant has approached us about extending their existing lease and potentially expanding into some of that space as well. And then one other known vacate is the Laddie building in St. Louis, which is 140,000 square feet. We expect to have a transaction on that early in Q1.
Nick Pillman
That's helpful. And maybe just on like FedEx or some of these larger boxes, obviously a lot in the news on just new supply being in bigger box. Maybe what's in place rents relative to just say what development rents would be?
Anthony
On the big box, we are, you know, we're still lower than the new product coming online. I think that is an advantage for us. Of course, and our... most of our portfolio is well positioned against the new supply coming online being much, much probably up to like a 20% discount.
Nick Pillman
And then maybe for Anthony, you guys in prior quarters had mentioned maybe refinancing the AIG loan with more secure debt. Was that more a factor of just working towards this investment grade balance sheet or was the pricing on maybe secure debt not as not as great as you initially had thought.
Jeff
Both factors played into the decision. So there clearly is heightened pricing with respect to secure debt. We also didn't like the lack of optionality with respect to secured. We think when we hedge the portion of the line that we should come in around six and a half That equates to a hedge rate of call it 4.8 plus our facility spread. So we do think that's well priced vis-a-vis today's alternatives. Yes, it's short term, but it serves as a bridge to get us to hopefully a less volatile interest rate environment two years from now.
Operator
The next question comes from John Kim with BMO Capital Markets. Please go ahead.
John Kim
Thank you. Your 23 guidance implies a fourth quarter increase in FSO and same-star NOI to 48 cents and 9.5% on the NOI front. I know you have some developments that may help with earnings, but can you just walk us through some of the drivers to get to your fourth quarter implied guidance?
Jeff
Yeah, certainly, John. There is going to be a little lift in top line know we had some temporary uh vacancy that that fills up in the fourth quarter but the the the big story is is really recoveries as we mentioned there was a dampening effect on same store which is attributable to higher than anticipated real estate taxes and maintenance expenses and to a lesser extent um insurance all of which are largely recoverable um and you know as As we've been rolling these legacy leases, Jim's team has been doing a really good job of converting those to more favorable lease types. And so we're going to see that pick up as we complete our final CAMREX in the fourth quarter. And then kind of prospectively, we're going to see improvement in recoveries in 24 and beyond.
John Kim
On your discussion of 24 leasing activities so far and the lease spreads that you've achieved, you guys mentioned that in 23 you started off at a more modest level and then those cash leasing spreads accelerated during the year. I was wondering if you could just comment on that dynamic. Is that a function of the mix of renewals versus new leases a year ago? And do you see a similar acceleration in 24 marked markets?
Anthony
Yes, that is exactly it. Most of the renewals kick in, and some of them have fixed rate renewals. I think the numbers around 40-something percent of the existing renewals had fixed rate leases. So those kick in early, and they start the rate off at a low level. And then as we get more market rates included, the overall rate goes up.
John Kim
If I could squeeze one more in, the 4.9% cap rate you got on your disposition, I know that went to a user, but what was the mark-to-market of that asset?
Anthony
Mark-to-market in Chicago is in the mid-teens.
Jeff
And then, John, just as a reminder, that was based on in-place NOI. On a fully stabilized basis, it's probably around 6% yield.
Operator
The next question is from Anthony Howe with Druist. Please go ahead.
Anthony Howe
Hi, guys. Thanks for the question. I just noticed that occupancy is down in Memphis, like I think 2.3%. Be great if you can provide any color on that.
Anthony
Yeah, we did, we had one tenant had a payment issue and they went into bankruptcy and we restructured their lease. So we split that space in half, that extra space is just came on the market recently and we've got a longer term deal with a new company that was formed after bankruptcy. And we also collected all the rent that they owed us as part of it too.
Anthony Howe
And if you don't mind, what industry is that? Is it like a CPL or?
Anthony
I think it was more printing.
Anthony Howe
Okay, thanks. Thank you.
Operator
The next question comes from Brian Marr with B. Reilly Securities. Please go ahead.
Brian Marr
Thanks, and good morning. Just wanted to, for me, are you guys starting to see any slowdown in construction activity in your markets that you would chalk up to the higher interest rate environment?
Jeff Witherill
Hey, Brian. Yes, certainly. I mean, I think that's part of it. And as you can see, there's some softening in the big box. You know, you see 7, 800,000 million square foot buildings kind of sitting there, even in parts of Columbus. So I think it's a combination of both.
Brian Marr
And then as it relates to getting leverage down successfully, and congratulations for that, is that increasing your appetite to start to look at new acquisitions? And if so, would that be funded with, you know, kind of a combination of cash and debt, or would you skew towards some capital recycling activity?
Jeff Witherill
So, and I think as we indicated, we're not going to increase leverage. So, you know, we're not going to go out and start buying properties, you know, on the line and move up leverage. So that's not going to happen. You know, We've also indicated that we're not going to be issuing dilutive equity at this time. So we're not interested in getting out there. So as we see deals that match up with the cost of our equity, we would certainly entertain that. We're still seeing some softening in the market. We're seeing deals get pulled by sellers. There's still some negative leverage in certain parts of the country that seems to be waning. I'm not so sure that's a great strategy, but some people are employing that. So I don't think that we have a real appetite for that. We are in discussions with people with OP units. So we're having a lot of discussions, but we're certainly not going to move leverage up. And is there a second part of that question that I missed?
Brian Marr
No. You know, it's mainly just, you know, how would you fund capital recycling? You've pretty much addressed it. That's all I have. And congratulations on getting out of New Jersey.
Jeff Witherill
Yeah. Thank you.
Operator
The next question is from Barry Oxford with Collier's. Please go ahead.
Barry Oxford
Hey, Jeff, you touched on acquisitions, but are you saying, look, there are some runoff opportunities in the market, but look, across the board, I just don't like what I see from a pricing standpoint?
Jeff Witherill
Well, I think it's more nuanced than that, Barry. We are seeing deals that – You know, the stock prices have been moving around a lot lately, but not in the too distant past, we have been at a point where we've seen accretive deals. You know, again, we're going to take a hard look at the real estate like we always do, the CapEx needs and so on and so forth. So there are deals out there. Again, very bifurcated market. In some markets, we're still seeing, you know, multiple bidders and negative leverage. In other markets, we're seeing sellers not getting the price they're looking for, and they're taking it off the market. We're also seeing desperate people out there. You have people that are stuck. They have to refinance. They're not going to put in more equity, and they're going to take pretty much whatever's out there. So for us, it's really just finding the right real estate as usual and making sure it's accretive. Right. But the answer is there's not a lot of product out there. That's very clear. Yeah.
Barry Oxford
But it sounds like you're waiting for the market to come to you.
Jeff Witherill
That is correct.
Barry Oxford
Yeah. Jeff, on supply, are you seeing supply kind of sort of slash deliveries seeping into your markets or maybe not as much as the national numbers would indicate?
Jeff Witherill
Well, I think you have to look at it sub-market by sub-market as opposed to just a market. I mean, if you take a market like Chicago, there's 21 sub-markets in Chicago, okay? And then really I think it's not so much the market, it's really the size of the building. As Jim said, we have 70,000 square feet for lease and we have three or four proposals. You can talk to someone that has 800,000 square feet and no one's been through the building in three months. So I think that's really what it is. And that's where all the building was, Barry, right? So as you go out and build, New construction, it's a lot cheaper, made a lot more sense a few years ago to go out and build million-square-foot buildings because that was all the rage. People were buying them unleashed at low cap rates, and I think that's dried up significantly.
Barry Oxford
Right, right. Is that one of the reasons why you're not interested in doing spec development at this particular juncture also?
Jeff Witherill
Yeah, I mean, I think you've seen that – tenants are taking longer to make decisions. They ultimately do make them, but there's been a slowdown, so we're not going to go out and put spec out in the marketplace. I don't think it's a smart move.
Operator
As a reminder, that's star one to queue up for a follow-up. The next question comes from Mitch Germain with JMP Securities. Please go ahead.
spk02
Thanks for taking my question. The contractual renewals that, Jim, you referenced, are those at market or are they at an agreed upon level? Agreed upon level. So that's already baked into the leases, you know, at signing is kind of what you're suggesting? Correct.
Anthony
And the leases that we inherited, we don't typically do that without leases.
spk02
Okay. That's helpful. And then, Anthony, I think you kind of mentioned the AIG loan. Obviously, it's on the line now. You're going to swap a portion of that. I'm assuming the swaps have flexibility for you to pay down without penalty. Is that the way that you're structuring that?
Jeff
Yes. We're going to have a multi-trench structure across the notional amount so that we preserve flexibility to the extent that we – you know, continue to execute on select asset sales and look to further pay down outstanding debt.
spk02
Okay. And as we think about 2024, obviously we'll have a little bit of a push higher in rate because of the change from the composition of that debt from the AIG to the line. Is that the way you think about it? It is. Okay. Great. Thanks, guys. Good quarter. Thank you, Mitch.
Operator
The next question comes from Mike Mueller with J.P. Morgan. Please go ahead.
Mike Mueller
Yeah, hi. I guess on the developments, the build-a-suits, I mean, can you talk a little bit about return requirements, just given the capital markets backdrop, given what you would traditionally underwrite on spec and just kind of put all that into context?
Jeff Witherill
Yeah, Mike, I think it's fairly simple. I mean, we've been building to high single digits, and I think that's, you know, if we can build to a high single digit, an eight or a nine, you know, it's accretive. So that would be how that would measure up. I don't know. If you want more color, I don't know what it would be, but pretty simple.
Mike Mueller
Okay. Got it. And then I guess, you know, with acquisitions specifically, being pretty spotty at this point. I mean, how should we think about dispositions over the next few quarters? I know you have something lined up in the fourth quarter, but even if you don't see anything on the acquisition side, do you think you'll still be somewhat active on the disposition front?
Jeff Witherill
To a certain extent. I mean, again, I think we've talked about this a lot, and we're happy to reemphasize that, you know, Like Chicago was a perfect owner-user building, right? There was limited parking, limited docks that made a lot of sense to sell it. And an owner-user is not looking at the cap rate. They're looking at maybe the next 20 years. So whether they pay $10 million or $14 million, I don't think it really matters to some people if they want that building and they want the location. So I think New Jersey is kind of a similar play for us. And we have just a handful of other properties that we've identified. Part of the strategy was to sell out of New Jersey. We have one building there. We have one building in Milwaukee we probably will sell, as we indicated. So if we're not going to gain scale, we're not going to be in a market. Our strategy is to try to manage. We're managing 70% of our properties in-house. That will continue to tick up over time. And I think that has, in the environment for the next couple of years, I think real estate operators I think you're going to see that we're going to deliver results of that strategy.
Mike Mueller
Okay. Thank you.
Jeff Witherill
Thank you.
Operator
The next question is a follow-up from Anthony Howe with Truist. Please go ahead.
Anthony Howe
Hey, Anthony. I have a follow-up question about the swap. What rate should we expect for those?
Jeff
I think we're going to come in at an all-in rate of about six and a half.
Anthony Howe
Okay. And for your watch list, has that changed over the past six months? And do you expect, like, that debt reserve to return back to, like, pre-gold level?
Jeff
Our watch list, and Jim confirmed this, has not materially changed. One in, one out. It is only a handful of tenants. And in terms of bad debt, we've had de minimis write-offs pre, during, and post-COVID. We're not anticipating a material increase in the run rate as it relates to bad debt.
Anthony Howe
Thank you.
Trip Sullivan
Thank you.
Operator
There appear to be no further questions at this time. I would now like to hand the call back to Mr. Wetherill for closing remarks.
Jeff Witherill
Thank you all for joining us this morning. We are available for follow-up questions as usual, and we'll talk to you next quarter. Thanks so much.
Operator
The conference has now concluded. Thank you for your participation. You may now disconnect your line.
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