Q1 2024 Plymouth Industrial REIT Inc Earnings Call

Participants

Tripp Sullivan; Investor Relations; Plymouth Industrial REIT Inc

Jeffrey Witherell; Chairman of the Board, Chief Executive Officer; Plymouth Industrial REIT Inc

Jim Connolly; Executive Vice President, Asset Management; Plymouth Industrial REIT Inc

Anthony Saladino; Chief Financial Officer, Executive Vice President; Plymouth Industrial REIT Inc

Todd Thomas; Analyst; Keybanc Capital Markets Inc.

Nick Thillman; Analyst; Robert W. Baird & Co.

Mitch Germain; Analyst; JMP Securities

Bryan Maher; Analyst; B. Riley Securities

Anthony Hau; Analyst; Truist Securities, Inc.

Brendan Lynch; Analyst; Barclays

Presentation

Operator

Good morning and welcome to the Plymouth Industrial REIT first quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the call over to Tripp Sullivan. Please go ahead.

Tripp Sullivan

Thank you. Good morning. Welcome to the Plymouth Industrial read conference call to review the company's results for the first quarter of 2024. Last night, we issued our earnings release and posted a copy of our prepared commentary and a supplemental deck on the quarterly results section of our Investor Relations page. In addition to these earnings documents, a copy of our 10-Q can be found on the SEC Filings page of the IR site. Our supplemental deck includes our full year 2024 guidance assumptions. Detailed information on our operations portfolio and balance sheet and definitions of non-GAAP measures and reconciliations to the most comparable GAAP measures. We will reference this information in our remarks.
With me today is Jeff Witherell, Chairman and Chief Executive Officer; Anthony Saladino, Executive Vice President and Chief Financial Officer; Jim Connolly, Executive Vice President of Asset Management; and Anne Hayward, General Counsel.
I'd like to point everyone to our forward-looking statements on page 1 of our supplemental presentation and encourage you to read them carefully. They apply to statements made in this call. Our press release, our prepared commentary and in our supplemental financial information. I'll now turn the call over to Jeff Witherell.

Jeffrey Witherell

Thanks, Tripp. Good morning and thank you for joining us today. I hope that everyone had a chance to review the commentary and supplemental information we posted last night. There are a few points that I'd like to make about the results and then we'll get right to Q&A. First, we continue to see several announcements made for new investments that companies are making in the Golden Triangle.
We've highlighted a couple of substantial ones from Toyota and Honda just last month. I'm also pleased to see that our friend Harry Moser from the reshoring initiative is becoming more of a household name in our industry. He was highlighted in a recent Stifel report, and we'll be speaking at the BMO conference next week along with Anthony. He's been leading this charge long before any of us and I strongly encourage you to follow him.
Second, our balance sheet and liquidity remains strong with fixed rates for well over 90% of our debt, and we're on track to operate in the 6 times range during 2024.
Lastly, we are seeing the transaction market unlocked a little earlier than we'd anticipated, but I'll reiterate what I said last quarter, we're focused on accretive growth in 2024 that translates into FFO growth. We intend to fund any potential new growth opportunities with a combination of asset sales and use of the credit facility. I would now like to turn it over to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions)
Todd Thomas, KeyBanc Capital Markets.

Todd Thomas

Hi, thanks. Good morning. First question, I just wanted to stick with investments. What you just touched on. It sounds like you're starting to see more and more opportunities. Can you just elaborate a little bit on pipeline today? And then based on the commentary, some of these if they sound like a sort of core plus or value add with some occupancy and rent upside, is there a way to kind of bookend, you know, the cap rates are the IRRs that you're looking to achieve?

Jeffrey Witherell

Hey, Todd, it's Jeff. Thanks for the question. So the basis for all of our investments, they need to be accretive right, going in. So we are looking for cash flow starting on day one of the product that we continue to look at and have has been kind of the shorter waltz where we're going to realize some significant growth in cash flow over the next one, two, three years on this, some value-add components to some of the stuff we're looking at, but we really don't underwrite to IRRs necessarily.
I think if you if you have that growing cash flow and you start at the right basis, the IRR takes care of itself. I mean, we are looking at assets like we always are both for the REIT also for the JV, really can't give you much more than that. But we are active in the market to answer the first part of your question, there are several portfolios in the market and there also are several single asset deals that are popping up. So we are seeing much more activity on the for-sale side.

Todd Thomas

Okay. And in terms of pricing, have you seen seller expectations adjust or change at all in recent months, just given the higher rate environment?

Jeffrey Witherell

It depends on where you are. So I would say yes to some of that. But in some markets, we're still seeing negative leverage deals get done. So somebody's counting on some significant rent growth, the mark to market to get to their hurdles. But in our markets, and I think the way we buy and the things that we buy, we're able to get some pretty attractive cap rates. So it's accretive going in for us.

Todd Thomas

Okay. And then I wanted to ask about the 769,000 square foot facility in the St. Louis market. It sounds like there's some interest there. You've been active marketing that. Two questions. Has FedEx officially provided notice that they are moving out? And then the second question is to the extent that they do, how should we think about the timeline to get a tenant in the door and for rent to commence for a facility like this? It sounds like you're talking to some manufacturer groups. I'm just curious if there could be some additional time required for them to sort of fit out their space and maybe also in terms of concessions? Just curious what we should be thinking about there.

Jim Connolly

Yeah, this is Jim. So as far as credit is concerned, they're moving out, they wanted to keep a small group back in space, but it just wouldn't work for us because we would be giving them the big office and we would have to them they'll build out a second office. So it really didn't work. The building is a very good building, as you could see, if you watch the video on, it's a large building. There's only really two buildings of that size available in the market right now, which is creating some of the interest that we're getting. The video is also generating a lot of phone calls. As far as your point about the what to expect?
Yeah. Some of the manufacturing would have a bit of a time to get their space set up we've addressed that with giving them early access, which gives us GAAP rent right away and then some free rent with cash rent starting next year that that's been a proposal. There's also the logistics companies that are interested that would be quicker than we get in right away and cash In-Stat faster.

Todd Thomas

Okay. All right. Thank you.

Operator

Nick Thillman, Baird.

Nick Thillman

Hey, good morning, guys. We've heard commentary from some of your peers on just tenants being a little bit more deliberate to commit to new space. So as we kind of look through like 2025 and you guys do have some like larger expirations, I guess, remind us what the rent differential is between like that class, a new product that's being delivered and kind of the rents that you're at? And then as we're looking at just like fixed rate renewals, I know that's weighed on the first half your lease terms around three to four years. So are we going to start to see that come down as we go into '25?

Jim Connolly

Sure. The differential between Class A and B and in some cases is at least $1 a square foot makes maybe more specific, whether it includes abatements or not on the fact that tenants are concerned. And we've recently just in the last few weeks, we're working with about 2 million square feet of renewals on 25 expirations with some large tenants. And as far as the fixed rate renewals are concerned, I mean mostly that that limits our growth side, we do have a bit in '25 however, in one case, one of our larger tenants has one and it's probably a good assurance that they're going to renew. So it is not always a bad thing, but they start really to burn off next year.

Nick Thillman

Okay. And then maybe just a general commentary on leasing. Have you noticed any shift in kind of tenant behavior? Maybe they're delaying kind of renewal discussions? Or are they a little bit more reluctant to kind of engage and conversation? Any commentary there would be helpful.

Jeffrey Witherell

Hey, Nick, this is Jeff. I think we talked about this last year as well, where what we were seeing were tenants, yes, taking their time on actually signing the lease, right? So they're negotiate the terms and then it's out for signature and they're sitting on it for 30, 45 days. And what we what we believe that to be is once they have that negotiated, they go out into the marketplace and tried to find, you know, a better deal, let's say or see or test the market to see where things are. And so when you're talking about our size space, if you need 50,000 square feet in one of our markets, there's probably not 10 availabilities for that. And so what we've just seen is people taking their time on that, Jim can add to that.

Jim Connolly

Yeah, that's been a trend that's been going on for the past year. Another thing that's going on is are the larger logistics companies are all doing studies on where they want to be in the future. And it's across the board, like I'd like prices Morrisville on signed leases longer than four months right now, but we're going to design a nine-month lease, which is which is great. And it's just because they're trying to gauge what their business is going to be like in the future. So it's not just efficient for better deals that they're also trying to maximize. It's in the right spot.

Nick Thillman

Very helpful. And that's it for me. Thanks.

Operator

Mitch Germain, Citizen's JMP. Pardon me, Mitch, your line may be muted.

Mitch Germain

Sorry about that. Jeff, I know you talked about match funding or at least match only a portion of potential acquisitions, but I'm curious if you talked about some sellers or some buyers emerging in some activity in the investment sales market. Is there potential for you to do some just opportunistic dispositions, assets that may not fit the long-term growth profile or may have some sort of leasing issue to address in the future?

Jeffrey Witherell

Yes, Mitch, I think we've kind of covered some of these things in the past. We have two or three buildings right now that are ready for sale. I think we've mentioned we want to exit the Kansas City market. I don't want to talk about our 50,000 square foot building in Milwaukee anymore, so ourselves in that as well. And I think you see this sale that's being put to us by the tenant is going to bring in some proceeds. So on top of that, we're always evaluating buildings that don't quite fit, hate to say too much on an open line about it because buyers are listening potentially, but we are always looking to prune assets that don't fit kind of around building wind markets or how you want to sell around building, you keep the rectangles.

Mitch Germain

Got you. That's helpful. And are there any other purchase options in the portfolio or is this kind of like a one-off item?

Anthony Saladino

We would consider this a one-off item that there are a definitive amount of purchase options on in-place leases that based on our valuation are unlikely to be exercised.

Mitch Germain

Okay, that's super helpful. Last for me. I'm curious about this structure. I know you've talked a little bit about a little bit longer to execute, but I'm curious about structure. Are you getting any pushback on term or escalators kind of in this new environment? Or are you still kind of able to push some of the some of the, um, you know, kind of wants when you're discussing leases with tenants.

Jim Connolly

So the start of the year, it seemed like it was going to go that way that there was going to be a lot of pushbacks, but it seems to change over the last month and a half. We're which we're seeing significant rent increases term five plus years and some into them. A lot of people gone, and we knew really, it's just changed over the last month.

Mitch Germain

Great. Thank you so much.

Operator

Bryan Maher, B. Riley FBR.

Bryan Maher

Okay, thank you and good morning. I was wondering if you could comment a little bit more on your thoughts on the Golden Triangle you put front and center on your prepared comments released last, May the Honda and Toyota announcements. Can you give us what maybe a little bit more color on how you think that and maybe other opportunities over the next year or two, again, impact the Golden Triangle and kind of more specifically you?

Jeffrey Witherell

Hey, Bryan, we put so much detail out there on the Golden Triangle, and we tried to add a lot more to it. I mean, those are the markets that we're primarily in. That's the markets we're going to continue to focus on. And based on all the data that we put out there, we believe this phenomenon is a is here to stay. Basically every week. There's new announcements. There's been there's been some fantastic information put out from for Harry merger as we as we referenced in the prepared documentation. So how we benefit has been in markets like Memphis, St. Louis.
I mean, Chicago, I mean, I think one of the big things we pointed out was Honda in Canada really getting set up for setting up in Canada and be able to bring that product down into United States. So if they're going to come down into United States is probably going to come right down into Chicago and distribute and big part of Memphis is bringing is bringing the product up from Texas into places like St. Louis in getting it distributed, you need infrastructure for that. So how we benefit is being in places like Chicago, where you have the lowest transportation costs in the country because you have the infrastructure and you have the employment base.
So all of these things are really what is going to drive on the future of onshoring and reshoring is going to be the infrastructure. I mean, I think we talked about it last time at home in order to secure a fairly significant lease in our new building in Georgia. We needed to negotiate a contract with Georgia Power, which we did. We're also some negotiating power in places like St. Louis and other markets, but that's going to be one of the prohibiting factors of reshoring is going to be infrastructure and then obviously, labor, you can get if you get those things figured out this phenomena is not going to stop. I think we benefit by being in these markets that have the infrastructure.
And is it too early?
The I mean, look we're analysts right? And we like to quantify everything. Is there is it too early to kind of really put pen to paper and quantify the impact on demand for warehousing space in these markets. And this is just a bigger picture you shot across about, hey, it's coming. We're going to have demand, but we don't exactly know what that demand level is going to be. And I think if you look at just investment in manufacturing, I'll get these numbers wrong. But between 2019, 22, 2020 and 2023, I mean you had an increase of about $180 billion of investments, right in new manufacturing. Can they think that that level of investment is going to carry for the next 10 years. So this is these are all this all data points. And so again, where are you going to build where you're going to put this new manufacturing that's coming in I think, you know, I don't know if we'll get to this, but this building in growth, Grove City, Ohio that we're selling. I mean, this has been really the what we've been talking about, I think one on one for two years now is that that building is occupied by American nitrile, which is the first manufacturer of nitrile gloves, is basically gloves for medical use, so on and so forth, the first manufacturing in United States in 50 years, and they're in that building. So they came in and put in $15 million to $20 million of improvements in the building. And in order to do that, we need to give them a purchase option, right? And so that that's why that was done and now they're now going to take that building and they're going to expand. So this is happening on the on the ground, and it's pretty exciting to say.
Okay, thank you.
That's helpful. Thank you.

Operator

Our next question will come from Anthony Hau, SunTrust.

Anthony Hau

Good morning, guys. Thanks for taking my questions. I'm just curious, were you guys able to extend the lease at 36 50 truck clicks in Memphis?
Yes, that's the most least we've extended.
Okay. Yes.
So that that's the lease that Jim mentioned, extended for nine months. Maersk is exploring the option to extend beyond that in the event that they don't. We have a another prospect already lined up. Interested to start in January '25.
Got you. And I'm I know it might be too early, but have you guys have any conversation with Geodis and Brocade about renewal?
Yes, well came in contact with us about extending at least another year and then scaled as we've talked to them, they were one of the first tenants last year, the last time they renewed that they held onto at least two and a half minutes. So I expect they're going to they're going to they're going to take us to the last date, but they fit the buildings full and the as a positive negative know.
Got you. And then just one last question on I know you said you're currently in negotiation with a communication test designed to extend the lease, would this be like a one-year extension or a multiyear renewal?
Are they asked they asked for several different options. We look for five your options and your options.
Okay. Got you.
Thanks.
Yes.

Operator

(Operator Instructions)
Brendan Lynch, Barclays.

Brendan Lynch

Thanks for taking my questions. You have a little less than a quarter of leases expiring in 2025. How soon can you start addressing those and where might that come down to as a percentage of leases to address by year end?
Yes, I would I would estimate that that number is going to be around 50% to 80%. We've got. We've got several large tenants that have already approached us about renewing. So I think it's going to come down quite a bit.
Okay. That's helpful. And then on development, maybe you could give a little bit of color on the prospect of leasing up the one facility in Cincinnati and also your interest in commencing the next phase of development at some point in the near future.
Think of the first part of the current space, the 53,000 square feet that's available Fisher Park, this industrial park on both tenants that are in the building now are asking about it, whether they are it takes some of that space, plus another tenant that's over in the main building an efficient industrial park is looking towards expanding that as well. Plus we have a few other prospects that are there. So we think it's going to lease up very soon.
As far as new developments concerning when we do outline in the supplement are the available land that we have another 1.5 square feet plus or minus to build. We have identified several parcels there where the buildings are designed and we could pull permits momentarily, but we're not going to do it on a spec basis like we did in the past. So we're going to wait until the build to suit shows up Palm before we before we break break ground, we think that's prudent.
Great.
Thanks for the color.
Thank you.

Operator

Appears there are no further questions this concludes our question and answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.