Plymouth Industrial REIT, Inc. (PLYM) Earnings Call Transcript & Summary

Good morning, and welcome to the Plymouth Industrial REIT Conference Call to review the company's results for the third quarter of 2024. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to the Plymouth Industrial REIT conference call to review the company's results for the third quarter of 2024. Yesterday afternoon, 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 when filed 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, the 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.

Thanks, Tripp. Good morning, and thank you for joining us today. I'll hit a few highlights first, and then we'll go to Q&A. We've made some big announcements in the past few months relating to securing capital that can propel our growth. In late August, we announced the strategic transaction with Sixth Street. I view this as transformative for us in several respects. Most notably, we put a valuation marker on our largest portfolio with the Chicago recap JV and sourced capital for up to $500 million in acquisitions. We secured a tremendous partner in Sixth Street, who has continued to build out their real estate platform. We also significantly enhanced our borrowing capacity with this month's refinancing and upsizing of our unsecured credit facilities to $1.5 billion. With this increase in the revolver and recasting of one of the term loans, we've extended our maturities and enhanced the ability to pursue other unsecured debt. The combination of Sixth Street and the additional borrowing capacity solves our current capital needs. Our focus for the balance of this year and throughout 2025 is on our leasing opportunities and putting the capital to work. That's what you can expect to hear from us in the next several quarters. Our earnings release and prepared commentary outlined a few tenant challenges we faced during the quarter that we did not anticipate. We are confident that we will work through these and get the spaces leased. We've always done a great job of keeping our buildings well leased and expect that Plymouth will have a greater exit velocity and momentum wrapping up this year. That will set us up for a strong 2025. We're off to a good start on the acquisitions front with the Memphis portfolio we completed during the quarter. We have another portfolio under contract in Cincinnati that we're excited about. Our pursuit pipeline is over 11 million square feet and over $1 billion in size with nearly all of the opportunities located in our existing markets. We know these markets well, and we now have the capital to expand our scale. I look forward to providing more updates over the next several months on how we're progressing with the leasing and capital deployment. I would now like to turn it over to the operator for questions.

[Operator Instructions] The first question comes from Mitch Germain with Citizens JMP.

So Jeff, maybe just talk about some of the issues that arrived. I mean, I know you have them in your prepared comments, but I think last quarter, you mentioned an issue in Cleveland that was unanticipated, but it seems like now you have some other vacancies that were realized that, I guess, were they unanticipated or the lease was delayed. Can you just maybe describe a little bit more detail about those different situations?

Yes. Sure, Mitch. Jim Connolly is here. As you know, he's head of Asset Management. So he's got all the detail on that, so we'll let him walk you through it.

So starting off with Cleveland, we had two issues in Cleveland, one at 2100 International Parkway where the tenant was up to date through Q2 on rent, but abruptly laid off all its employees informed us they couldn't pay rent. So we evicted them effective 9/30 and taken legal action against them, for whatever rent they owe us and in future rent. At the end of Q2, we were pretty far along with a half building user, but that they put that deal on hold. However, now we're really far along with a full building user that wants to take the building at the beginning of 2025. So I mean, we acted pretty quickly and got a tenant identified. We also have a backup tenant for that building should that deal not go through. The other building in Cleveland is 1350 Moore Road. The tenant was current as of Q2. However, it became clear that, that business was not going to be viable going forward, and we started the eviction process. This all happened very quickly. The tenant left a bunch of equipment and inventory behind that had to be cleared out, which was -- cost us approximately $500,000 to clear up. We had a replacement tenant that was executed and is currently in dispute due to the prior tenant interference that we still need to resolve. We are pursuing legal action against the prior tenant and trying to rectify the situation with the new one. We are also pursuing new prospects that we have lined up for next year should our current lease not be rectified. And that we do have a specific prospect in mind. I want to point out on vacancy that there's really -- it's not a bunch of new vacancy. There's St. Louis property that we've talked about all year, just went vacant in July. And there was the Chicago property that's been vacant which we'll be going to get into detail in about a second, but if you exclude those two, we only have -- it's 2.7% vacancy. So it's really just those two leases that drove the Q3 vacancy.

Okay. Thinking about some of these tenant issues, I know that it appears that they weren't exactly things that were on your watch list prior to identifying them. But are you spending a bit more time engaging with your clients to gain a better sense of their respective businesses to identify what other issues could arise?

Yes. We're constantly doing that. In this case, I think we moved swiftly to eliminate a long protracted problem, and we're working with all our tenants.

Mitch, I think we've been on this for 7 years about this, right? We've built a vertically integrated platform. We manage about 75% of our own properties in-house. We engage with our tenants on a daily basis. This was something that came up very swift. It's not a portfolio-wide issue. And as Jim alluded to, we're backfilling these -- both of these spaces very quickly.

Okay. Jeff, anything you could share about the Cincinnati portfolio?

Yes. It is about $40 million. It's a multi-tenant. I think it's going to come in at a pretty good yield. I think we're going to like the yield on it, and it's got the growth that we're looking for, similar to Memphis. That's probably about it. I mean, we are under contract...

I was just saying is that going to close prior to year-end or you anticipate like right around?

I believe it will close before year-end.

Okay. And then maybe just provide some perspective on -- I think what you said about $1 billion pipeline, 11 million square feet, was that?

That is correct.

Yes. Can you -- anything there that -- is it one-off? Is it portfolios? And then to the extent, obviously, you've got about -- if we net out the $40 million purchase, you've got about like $450 million or so of dry powder from the recent transaction that's closing. So I mean, kind of what's -- is there potential to grow Sixth Street as well to maybe unlock some additional growth?

Yes to all that. It's certainly -- there's three portfolios in there. Again, I don't know where these go. I mean, we're actively negotiating, so we'll see. One portfolio would be on balance sheet. We have another one that would work as a JV. And that's mostly a geographic concentration as well as if it's got a value-add component that we don't want to bring on balance sheet, the same reasons we've done JVs in the past, right? So we have that identified. There's a lot more one-off deals that are popping up in our markets. And then just small portfolios, $15 million to $20 million portfolios. So it runs the gamut. Again, we look for some good starting yields, but we're also looking for growth. And so that's the mandate. So we're pretty excited about our existing footprint. We've got some -- as I think you alluded to before, we have a couple of deals in Texas we're looking at. So that would be a market that we've always wanted to get into. We'll see how that plays out. So yes, I mean, Sixth Street is there with plenty of capital. It's really just putting the deals together.

The next question comes from Rich Anderson with Wedbush.

Maybe just to put a finer point on Mitch's question around Cleveland. You mentioned abruptly laid off employees in the case of 2100 and business not viable in the case of 1350. Maybe I don't know what those businesses were and maybe I don't want to know, but I'm curious as to what the learning event is from this in terms of just sort of monitoring credit, monitoring industries that you're exposed to and if there's anything that you take from this that you look throughout your portfolio and say, we've got to give something here or there a second look and make sure that we're protected. Any comment around that topic?

Yes. I mean, obviously, both of these industries were fairly new industries. One was -- the one at 2100 was an online retailer that had some sort of new system that was going to improve everybody's online ordering, but it didn't really pan out. Everybody used different sources. And we kept them, I mean, they were in there for a couple of years, and they're always current on rent. And we had -- we made sure that all of our investment, our commissions and tenant improvements were paid back. We had a letter of credit that covered all that. So we didn't lose on that investment, we lost on the future part of it. And the other tenant is refurbishing windmill furniture. So it's a business that is a viable plan, but it's just -- it's in its infancy. And they were current for a couple of years as well. So I would say moving forward, we would definitely not pursue these new type of transactions without a larger backing financial support.

Okay. I guess I never thought of sitting on a windmill, but I guess now I am thinking about. The second question is the marker on the Chicago cap rate with Sixth Street of 6.2%. That -- would you agree, not to be a cynic here, but would you agree that, that number was influenced by the fact that there was also the preferred and there was also the warrants, like in the absence of those other elements of the transaction, would that 6.2% really have been 6.2% or would have been something greater?

Well, Rich, this is Jeff. I think it's -- I mean, Sixth Street wouldn't have done one without the other, right? I mean I think this is a transformative transaction. They underwrote the entire company. They looked at -- they physically looked at over 75% of our assets. So they're backing Plymouth, if you will. But as far as the portfolio is concerned, and this is where I'll go back to this and continue to pound the table as I've done for the last 6 months, there have been a number of trades out there of like-kind properties to Plymouth portfolios of anywhere from 5 million square feet to 14 million square feet that have traded between 6 and 6.5 cap. That's the marker. So again, we have 35 million square feet of property at a great basis, and we're going to get all this product leased as we always do. All of us in this room have been in the business for at least 20, 25 years. And I think when you cap our NOI next year, you're going to be right back into a great NAV calc based on those comps. I mean we're in the market every day looking at portfolios, and we're getting outbid because people are paying 6%, 6.25% caps for the stuff. So I stand by that.

And then, Rich, can I just -- Rich, one follow-up to Jim's commentary with respect to 1350 Moore. This tenant was on the watch list. We were working closely with them to potentially recapitalize their business. And as a contingency plan, we sourced, identified and fully negotiated with a new tenant at a 27% positive spread to expiring rents. That's the tenant that Jim mentioned with respect to the lease-up and now there is some legal contention, but ultimately, that will be sorted out here in the near future. So I don't want the takeaway to be that we haven't been acutely focused on tenant health. We have been. These tenants, in particular, were closely watched. I think what we were surprised by was the velocity of change. But to Jim's point, we've moved quickly to vacate a tenant that wasn't going to pay rent, sourced, identified and prepared the space to accommodate a new tenant at a substantially improved rental rate.

Very good. And then last question for me. You mentioned NOI next year. I don't think you're going to give guidance, but there's a lot of movement here, right? You have Chicago, you have Cleveland, Memphis, the joint venture and St. Louis, of course. When you net all that up, is there growth next year from the company? Or do you think that you got to work some things out and sort of TBD that maybe the real number to look at would be the year following when everything is sort of addressed?

No. I do believe that there is significant growth ahead. We will -- I don't know if we'll get into it to ask this question, but like in St. Louis, we ran through a whole -- I think we ran through over 10 prospects. We now have another group of prospects in there. I mean I think if you look at the overall national vacancy rate, it's at 6.4%. The long-term average is 7%. All the brokerages are telling us that they feel that 2025, there's going to be an uptick. Construction, I think we're delivering about 300 million square feet this year. That's the lowest since 2018. So there's still 96 million square feet of absorption so far year-to-date, probably going to break 100 million. So there's still good things happening in industrial. And if you go to Memphis, we have a lot of opportunity to mark-to-market. I think we did tell people, but I'll reiterate it that we started that out at an 8% yield. Over the next 2 to 3 years, that probably gets us to a 10% yield. I think the Cincinnati portfolio is going to provide similar metrics. So I feel really confident that we get St. Louis leased up as we've mentioned, these two properties in Cleveland have prospects there that we're working on. So I feel really confident that we're going to get some pretty good growth next year.

I agree. It's just a matter of timing, right? You get something leased up, it doesn't necessarily cash flow immediately, is the main point that I'm thinking about. And just the cadence between '25 and '26.

Yes.

The next question comes from John Kim with BMO Capital Markets.

On your Memphis acquisition, you mentioned Accredo Health is leaving some of their space by year-end. Was that known previously? Because I think in the last call, you mentioned the 70% tenant retention rate on the portfolio.

John, this is Anthony. Yes, that square footage was a known vacate. There's about 100,000 of that, that was previously a call center that we're converting back to more templated industrial space. We don't know if we're going to deliver two 50,000 square foot suites or 100,000 square foot building. We're going through the diligence on that as we speak. And then there's another 33,000 square feet, again, previously occupied by Accredo Health. It has a higher office finish. It's an office-like building. We're likely to divest that. In fact, that is currently under contract.

Okay. And then Communication Test Design, they renewed or extended, which is what you had indicated. What are the chances that they extend past that year? And would that be at market rents? Or is there a prearranged renewal rate?

There's not a prearranged rate. Obviously, it's a large space. So it would be at market or a slight discount to market because they're taking up a lot of space. But their contract, the reason why they wanted a 1-year deal was because their contract has a 1-year out on it with DIRECTV, I believe. And as soon as that extension date goes by, they will extend. Now if for some reason, that contract didn't extend, there's two buildings there. It's not one building. They would always need one of the two buildings, so they would extend one of them, not the other one. So it's not likely that they're going to move out.

In your prepared commentary, there was a mention of transitory vacancy, 487,000 square feet. Some of that was going to -- it sounds like a start into 2025. But then there was wording about executing leases on 70% of that space. So I'm not really sure if those two sentences tied to each other. I was wondering if you could just elaborate on that transitory vacancy.

Yes. There were some leases that we expected to start in Q4 or start generating cash in Q4 that likely are going to start in 2025.

Yes. So the 70% reference, John, was for leases executed but not commenced. But we'll see contribution from 70% of that transitory vacancy in early Q1.