Good morning, and welcome to the Plymouth Industrial REIT Second Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Tripp Sullivan, 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 second quarter of 2020.

On the call today will be Jeff Witherell, Chairman and Chief Executive Officer; Pen White, President and Chief Investment Officer; Dan Wright, Executive Vice President and Chief Financial Officer; and Jim Connolly, Executive Vice President of Asset Management; and Anne Harit, General Counsel..

Thank you, Tripp. Good morning, everyone. Thanks for joining us today.

The global pandemic has presented all of us with a number of challenges over the past several months, and I'm pleased to note that our team has been able to stay focused on the things we do best here at Plymouth, which is combined a long heritage as real estate operators with the insight to make some enhancements to our long-term strategy.

Some key notes here. We work closely with our tenants, providing them great service and responsiveness. As a result, we were able to collect 99% of our expected rent for the quarter and have already collected 97% for July. We have continued to lease our properties with attractive cash rent increases and have a strong start on our 2021 expirations.

We also maintain an active pipeline of new opportunities with a particular emphasis on the markets that have large pools of skilled blue-collar workers in light industrial product in infill markets. We also improved our liquidity and the greater confidence in our outlook freed us up to pay down some borrowings on our credit facility..

Thanks, Jeff, and good morning, everyone. Last quarter, I outlined our thoughts on the future of the new environment we are encountering, how well our portfolio and target markets can fit into demand for industrial space and where pricing could be. Over the past few months, we saw some good indications of how that future could play out.

But before I get into that, let me touch on our pipeline. Consistent with the expectations we laid out last quarter, we have not completed any transaction since March.

Even though we pressed the pause button on a number of acquisition contracts and letters of intent as well as joint venture opportunities, we have been quite active in every deal we had previously underwritten as well as pursuing new opportunities.

There isn't any real change in the overall size of the pipeline, but we have seen a number of potential acquisition opportunities come back to us of late with motivated sellers and our partners. Pricing throughout the industrial sector has held up fairly well during the pandemic.

There haven't been as many deals that haven't transacted for obvious reasons, but there have been some pricing dislocations and select deals due to the buyer pool temporarily shrinking.

This might give us the opportunity to replicate what we've accomplished in the past, with sourcing attractive entry points to new markets or even the ability to acquire some select Class A or A minus assets at Class B pricing.

I would attribute much of the lack of long-term pricing disruption to the trends we discussed at length last quarter, such as the resurgence and resilience of American businesses, the growth in e-commerce and limited supply with strong and increasing logistics demand..

Good morning. Leasing activities remained at a high level, continuing the leasing momentum we established last year. At the end of Q2, we had already addressed 78% of our leases that were due to expire in 2020. During the second quarter, 21 leases commenced, totaling 1,398,000 square feet.

Of this amount, 1,349,000 square feet was for lease is 6 months or longer, which is comprised of 1,286,000 square feet of renewal leases and 112,000 square feet of new leases.

Significant leases, including a 7-year 638,000 square foot renewal with Ingram Publishing Services in Jackson, Tennessee and a 5-year 225,000 square foot renewal with Sappi in Chicago. Overall, we had a 9% increase in rental rates on a cash basis over prior leases with a duration over 6 months.

Portfolio-wide occupancy at June 30 was 95.1%, down 90 basis points from Q1, mainly due to an expiration of 118,000 square feet with Colony at our 3,940 stern locations in Chicago. The tenant had been month-to-month with us for a couple of years.

We are not - we are in the process of multi tenanting that building and 36,000 square feet of that space has already been released effective 08/01. Occupancy increased to 95.4% during July with several small leases being executed.

We have had minimal impact related to COVID-19 and don't expect much further of an impact due to our strong tenant base, which has expressed that they intend to continue their business plans and our facilities going forward. The majority of our remaining 2020 scheduled expirations, which will only represent 1.5% of our space, are expected to renew.

To date, we have collected 94% of our rents build during Q2. And if you factor in our executed rent deferrals, our expected rent collection is at 99% for the quarter. July has seen a 97% rent collection rate to date.

We monitor our collection efforts daily and keep regular communication with our tenants to deal with occupancy issues and to help them meet their lease requirements.

Turning to our leasing activity for all of the 2020 expirations and beyond, I will remind you that we had 2.8 million square feet initially scheduled to expire in 2020 or approximately 14% of our total portfolio. Another 100,000 square feet was terminated early during 2020 as part of a deal transferring space between 2 Chicago tenants.

That brought the total amount of space we needed to address in 2020 up to 2.9 million square feet. Prior to year-end 2019, we had already addressed 1.4 million square feet of this space with new or renewal leases.

To date in 2020, we have brought that running total up to 2.3 million square feet leased with renewal on new leases or 80% of the 2020 requirement. In addition, we have leased out 100,000 square feet of space that was previously vacant. The leasing continues to be performed with an average cash rent increases of 10% over prior rent..

Thank you, Jim, and good morning. Our second quarter results were in line with our expectations. Operating metrics were once again up on a year-over-year basis with contributions from new acquisitions.

Same-store NOI on both a GAAP and cash basis, excluding the early termination income for the quarter, was impacted by the vacancy that Jim referred to, that is being actively addressed, along with the timing impact of new leases, which in certain cases, have initial periods of free rent impacting the early months of the term.

A few other items of note in the quarter. Significant year-over-year acquisition activity drove revenues, NOI, EBITDAre, FFO and AFFO. We had a full quarter contribution from the $88 million of acquisitions that were completed in Q1.

FFO and AFFO available per share and unitholder were $0.51 and $0.45, respectively, after the impact of the additional shares was offset by reduced interest costs as rates continue at historic lows.

G&A in the quarter increased to reflect additional professional fees as we transition to the audit services PricewaterhouseCoopers and also for occupancies costs as we were delayed in completing the transition to our new office at 20 Custom House Street and the sublet agreement that was to be executed for our prior space did not get finalized due to the coronavirus concerns of the subtenant.

G&A includes approximately $383,000 of noncash expense, representing amortization of stock compensation that is an adjustment to AFFO; and approximately $154,000 of noncash expense related to the occupancy timing. During the quarter, we raised approximately $12.5 million in net proceeds from our ATM.

Regarding our balance sheet at quarter end, we had 67.9% of our debt in place with fixed at interest rates at approximately 4.15% for the next 2 to 8 years. The balance of 32.1% represents borrowings outstanding on our credit facility and the term loan we put in place in January with an applicable interest rate at June 30 of 2.44%.

At quarter end, leverage was 49.7% on gross asset value, and our total debt to annualized second quarter EBITDAre was 8.1x compared to 48.3% and 8.1x respectively at year-end.

We have expected that our leverage would settle in the mid-50% range over time with continuing efforts to decrease leverage to 50% or less in a logical manner as the opportunity arises.

As of August 5, we had approximately $4.5 million in cash plus operating expense escrows with real estate taxes and insurance of approximately $9.1 million, and availability on our line of credit of $29.9 million. We have no material debt maturities until 2023 with the exception of the term loan with KeyBanc that matures in October of this year.

Recall that we put this in place in lieu of exercising the accordion option on our credit facility. The equity secured term loan was a more flexible option, and it was purposely short in order to wrap this loan with a new expanded credit facility that we expect to enter into later this year.

We have been in regular discussions with KeyBanc about this loan, and we believe that will be completed before maturity. As noted earlier, we have continued to collect our rents over the past 2 quarters with 99% collected for both Q1 and Q2. For July, we have collected 97%.

However, at this time, we're not able to predict weather and to what extent our level of rental receipts may change in future months. And as a result, we are continuing to withhold formal guidance until we have a better understanding of the duration of the COVID-19 pandemic and its impact on our business and the business of our tenant.

That being said, I would point to the results of the past 2 quarters, and our overall historical performance as we set expectations for the balance of 2020.

The primary factors to consider would be the run rate for collections and CapEx as well as the level of leasing activity and the fact that the lower interest cost from historically low rates is offsetting the higher G&A investments and a higher share count. In closing, I would like to reiterate that the portfolio is performing well.

We are taking the necessary steps to address the uncertainty and potential needs of the company, and we have a solid base of liquidity to fund working capital needs.

And lastly, I want to recognize the effort and dedication of the finance and accounting team that are the underpinnings of the information presented in our financial statements and related filings, including this call. They continue to step up each quarter.

I'll be happy to address any additional questions on this commentary during questions-and-answer period. Operator, we are now ready to take questions. Thank you..

Your first question comes from Barry Oxford from D.A. Davidson. Please go ahead..

Great. Thanks guys. Maybe this is for either Jeff or Penn.

To the extent that you guys are able to know this, what percentage of our tenants, I imagine it's a low that are getting PPP money and using that to pay rent? Do you guys have a sense of that number?.

I don't know that off the top of my head. Jim, are you aware of that? I don't know if we're tracking..

I don't have the --..

I don't think there's a way to track it, Jeff, in you all's defense. Just kind of what you're hearing..

So it does not that many, but we have had conversations with a few tenants that have said they've been waiting for the PPP money. And it's less than 5%..

Okay, okay. That's what I thought. That's what I thought. Just changing gears a little bit, you guys mentioned JV partners.

What are you seeing as far as JV appetite out there in the marketplace right now? And then if you could characterize those, is it coming from institutions, or is it coming from PE or sovereign wealth or maybe the answer is, d, all of the above?.

Yes. I mean, Barry, it's kind of the same story we've always had. There's a lot of demand from the investor side. Some of them are kind of catching on now, believe it or not. They're underweight industrial. And we continue to have serious conversations with people.

In our world, we want to work with someone who's a good partner that it's a win-win situation. So it's coming from a variety of sources that we have discussions with. But at the end of the day, as much as everybody wants to execute very few people do execute in the JV world. There's a lot of wishing going on.

So we continue to have meaningful conversations..

Your next question comes from Craig Mailman from KeyBanc Capital Markets. Please go ahead..

Good morning, guys. I know it's still relatively early in this whole situation. But just curious, if you guys have started to see any leasing inquiries, either from kind of tenants looking to add space for restocking initiatives or adding safety stock and/or the onshoring initiatives. We saw Kodak is reimagining what they are.

And just wondering if there's any other tenants out there like that, that are - you may start to see pharma come back or any other industries?.

Yes, Craig. So Jim might have a little more color on it. I know from my perspective, just want to make sure this gets out there. We've actually had during the pandemic, we've had 2 tenants that called us about rent and what have you, simply because they were open for business, but they were having a hard time getting raw material from overseas.

So their supply chain was affected, if you will. There - they continue to pay the rent. There wasn't as much a disruption from our side to they were. And both of those tenants have - are looking for additional space with us. And somewhat anecdotal, I mean, I don't think we have a big enough sample size.

But we have seen a couple of tenants that have indicated that they need to start stocking product, more products here in the U.S. from that perspective. And then the one last thing I would say, I want to call it reassuring, but we did have a tenant, we do have a prospective tenant looking to relocate from some other parts of United States to Chicago.

And what the catalyst was, was the skilled blue-collar workers, where they were now was somewhat remote. It just didn't have the skilled blue-collar workers. So believe it or not, they were heading to Chicago to tap the pool.

So Jim, can you add some color to that?.

Yes. I would say that one thing we've seen, obviously, early on, there was a lot of doubt, and people didn't know how the businesses were going to be impacted. But most of our tenants and like high, like 80%, 90% are doing better than they did prior to COVID-19. The logistics companies are looking for more space, they're moving more product.

And several of our like manufacturing type tenants are producing more product than they ever did before. So they're looking to expand in the buildings, they're looking for temporary space to fulfill their needs and with the intention of making it permanent long term..

Okay. That's helpful. And then just going back to the capital situation here. I mean the resized dividend clearly gives you some more liquidity as the year goes on. But I know you guys had thought maybe back in April, you would have had an opportunity to kind of reload from a dry powder perspective. I guess we've talked about JVs in the past.

Could you give a time line on how close you are to that or whether these are just kind of cursory? And then also, I know Penn, you said pricing has kind of rebounded.

Are there any larger portfolios out there where guys just need the liquidity and maybe the pricing makes sense to do a little bit of a larger offering and mix in with some lower-cost debt to be able to give you guys a little bit more breathing room?.

Yes. I think Craig; it's a 2-part question. So I think Penn can get ready to answer the portfolio part of it. I mean, I think from our perspective, we've got a few resources out there. On the JVS, we are close. We continue to talk to the right people, and we have a good pipeline, and Penn can talk about that.

Again, we're kind of always close with the right players if you can line up the right deals at the right time. But we're making some progress with that. We feel confident about that. And secondly, yes, I mean, we will - the equity markets are starting to recover.

I think today is a big day for us to show the resiliency of our portfolio and our ability as a team to operate in this environment. So I think from that side. And then I think Pen might be able to add something to that..

Yes. I mean, Craig, just to add some color. We've always maintained a pretty robust pipeline, especially throughout the last few months.

But we have somewhere between $90 million and $100 million worth of deals that are kind of an active either letter of intent issuance type stage or close to P&S and probably twice or 2.5x that much in preliminary underwriting stage. And it's all kinds of - there's one-off deals or small portfolios.

To your specific question about any large portfolios that had been sold off for maybe COVID-related regions, we really - haven't seen too many. There's 1 or 2 I know of that, that were sold off probably because of some related dynamics regarding the COVID-19 issues, but by and large, pricing - so there's been some dislocation, as I mentioned.

But by and large, there's still a fair amount of capital on the sidelines that is very interested in placing it in the industrial sector, and that's had a positive effect on our portfolio..

Okay. Just one follow-up on the JV because it sounds like, as you said, you guys are closer.

Kind of hypothetically, what would this look like? Would you guys contribute existing assets to this to kick it off with the understanding that it would be used for maybe value-add or what have you, acquisitions going forward? And how big of exposure to the JV would you guys want just given your smaller market cap?.

Yes. It is somewhat hypothetical here, obviously. Again, we've reiterated or continue to that we have all types of deals, some that the REIT can't do, which - what does that mean? It means that they may have maybe more value-add and to dig deeper to that, maybe there's some vacancy.

And then possibly, one of the ones we looked at in the past that has come back, the sellers bring it back to the market, is a deal that just has extensive CapEx.

And as a smaller cap REIT, you kind of get dinged by investors and maybe analysts, you can answer that, Craig, if we're going to buy something that needs heavy CapEx and then we're putting the money into that property, and it affects our numbers on this in the short term.

I mean, as a real estate operator, long term, those are the deals we should be doing, but we might get dinged in the market for that. So we would look to do value-added opportunistic type deals in a JV where it fits into our platform. We will not do unless we're going to make money doing it, right? We're not in the business of hope as a strategy.

So we're not going to go into this solely focused on some sort of promote. So if we can make money on property management, we can make money on asset management. I think we can - we've proven that we can bring deals, structure them, we can close them efficiently with our team of lawyers and due diligence providers.

So there's a lot of value in that, that a lot of people, I guess, don't see. But being able to actually get deals closed efficiently and accurately is hard, and that's something that we excel at. So as far as size is concerned, I don't think that's a big issue from a market cap perspective.

I think the more product that's out there that we can be involved in and use our platform and generate fees, I think, is a great thing for the REIT. I mean, as a shareholder, I'm very excited about that. And I think that you'll also see if we do something, we'll have right of first refusal or right a first offer in there.

Again, if it doesn't benefit the REIT, we're not going to do it. But just taking advantage of our platform to do things that the REIT - most likely is not able to take it to do..

Okay. So hypothetically, it doesn't sound like you would see that with anything, it would just be a vehicle for acquisitions down the road..

We think, I mean never say never. I mean, we don't really have any assets that we think we want to see. We like our assets. We've sold off one asset. We continue to look at the market and see what other assets make sense to sell maybe things that don't fit that are user-centric.

But for the most cases, our portfolio is utilitarian, can be used for distribution, can be used for light manufacturing. We don't really have any single-use buildings, if you will..

All right.

And you guys say value-add, would you do something as kind of value-add as a retail conversion in your markets? Or is that just outside the scope of what you guys are looking at?.

I would say it's probably outside the scope, although I think if you look at the resumes of the people involved in Plymouth, it's very dynamic. I mean we've built. My background, I started as a surveyor and a civil engineer. So I certainly designed many commerce parks and so forth.

And if you bring Penn and everybody else into it, our ability to build would be there and our ability to renovate is certainly there. I think we've proven - I think Jim and his team has proven that - their ability to put new roofs on an HVAC and to do tenant build-outs.

Our guys on the ground in our markets are very skilled at that, a lot of experience. So until we take care of that, I just don't think that - I don't think that heavily of a retrofit is probably something we would do. Never say never, but that's not something we're actively looking for..

Our next question comes from Gaurav Mehta from National Securities. Please go ahead..

Thanks. Good morning. Just to follow up on your comments, I think you mentioned $90 million to $100 million in active deals in - or under LOI.

Are those deals for your wholly owned portfolio? Or you were talking about JVs?.

Yes. No, those are for REIT only, not JVs..

Okay.

And I guess, in terms of funding those acquisitions, how should we think about the split between equity and then if you were to close those deals?.

Well, we have - it would be a combination of capital and debt. We're not - right now, we'll - we can close some. Some we're going to probably push out a little bit. But a lot of that depends on our availability on our line. Dan can probably give you some more insight into that, if need be.

But we've - but the main message is that we have deals that we are working and can close in short order. So we're prepared to do that..

Okay. And I think you also talked about some pricing dislocation in the market and then pricing holding up pretty well overall in this space.

So maybe provide some color on where you're seeing dislocation? What's sort of driving that dislocation for that particular asset or I guess in the particular market talking about?.

It's hard to generalize. So each deal is specific, but oftentimes, it has to do with the seller needing to sell an asset maybe before the quarter ends or maybe because he has partners that want to liquidate and focus on other things. So I don't mean to avoid the question, but it's - there are different reasons for different sellers.

But we have had a number of deals that we were working on in the first quarter, early part of the first quarter that were kind of put on hold and have recently come back, and there's been some repricing, but the repricing is really, it's not significant. It's marginal.

And I think that is indicative of the demand for putting capital into the industrial space that we're in..

Okay.

And lastly, for the rent deferrals maybe provide some color on what kind of terms you are seeing for the rents that you're deferring?.

I'll let Jim answer that..

Our referrals are - they're all going to be paid back within eight months. So the periods covered started in - some started in May, there's one that went into August and they're all going to pay back by the end of February..

Okay. And I guess you got collected 94% of the rent, 1.6% was deferred and your overall collection is 99%.

So I guess how does that add up between 94%, 1.6% and 99%?.

It's 1.6% on an annual basis. Sorry, on a total monthly - wait a second. Yes. So it's a total annual basis. So the rent - some tenants were two months, some were three and the maximum was four. And if you added that up, it's 1.6% of the annual rent..

Your final question comes from Henry Coffey from Wedbush. Please go ahead..

Good morning and thanks for taking my question. I hate to sound stupid, but why not.

Can we go over to some of those deferral numbers again? How many tenants are in deferral right now?.

11..

11%. And it's - you said it was 6 to 8 months of deferral..

No, it was 2 to 4 months of deferral, but the payment is over 3 to 8 months..

Okay. And then - I mean, just - that's helpful. And then in terms of the cross wins on industrial space seemed to be really interesting, particularly to anybody listening to this call.

And because you have opportunities to reposition properties, you have rising demand; you have sort of out on the horizon, a real serious kind of reshape probably in the economy. I think regardless of who's President, the theme is going to be onshoring, the encouraging businesses to develop and build more in the U.S.

- build, manufacture more in the U.S., it doesn't matter who - who's in charge. So we have some very positive wins here but then you have the more near-term disruptive effects.

How long do you think this really takes to play out when we can have all the negative issues sort of in the rearview mirror and all the positive things ahead of us?.

Yes. I don't really have a great answer for you. I mean we I caught up like everyone else in the day-to-day and the week-to-week. I mean, I don't think I've looked at the Johns Hopkins website in two months now, which is overwhelming, try to predict what the future was going to do.

I mean - I think, as I mentioned in the prepared remarks, the report out on JLL put it out about three weeks ago and now I guess, where they - they put out a report that if you're in the business, you jaw dropped when they put out 1 billion square foot of demand by 2025. And that's a staggering amount of real estate in any way, shape or form.

So even if they're half correct, right, 500 million on demand. I mean, that's about where predictions were a couple of months ago from the likes of like CBRE and Prologis is out there with 400 million to 500 million square feet of demand. So we're just not - I don't know.

I mean, if you look at our rent collections, and you look where we are right now, things are going pretty well. So I don't know how to predict when we're so-called out of it and what out of it even means. We're focused on the next 3 to 5 years. And that next 3 to 5 years should be just - should be fantastic.

And so we're focused on doing what we can now to position the REIT to take advantage of that. So it's awful interesting, say, for me, when I listen to the big pension plans will come out and say, over the next 3 years, they're going to reallocate to real estate. And mean the time to reallocate to industrial real estate is right now.

So we're positioning the REIT for that. We've got the talent for it. We've got - certainly have the credit facility for it. And we will access the capital as we've talked about, either through the public markets or through the JV market. So one way or another, the REIT will be participating in the resurgence here of industrial.

It's really just acceleration. It's a little long-winded answer. Hopefully, I've added some color for you..

No, it's just really - like you said, you get caught up in the minutia of 1.6% of your annual rents are under deferral. And then you look at the other end of the equation and you look at the JLL report or other indicators. And the world is changing and it's probably moving your way. And it's just the matter of time.

The other question that we've talked about in the past, what are tenants, either current or perspective, really demanding from you? In terms of - do they want great rents, great locations, B properties, let's not get too crazy here, or are they talking to you about different needs, different - I mean we know everything is changing in office, but is it what's going on in the industrial space on that front?.

Yes. This is again; we can give a long-winded answer. I'll say one thing and maybe Jim is on the front line with some of these tenants. But the one thing I'll just make - I'll make a point of is that - and this may be contradictory when I say these, but think about it, like we do every day, it will make sense.

And number one is that the real estate component in the supply chain, right, is about #6 on the expense the expense sheet, right? So as opposed to other types of real estate, maybe office, for instance, behind personnel, office is #2. But in industrial space, it's #6. So it's not that expensive, okay, of an item.

There are 5 other things that they need to pay attention to besides the size of the real estate. Now again, 100,000 square feet, whether it's $0.50 a square foot or $1, it's not huge money. Now the contradictory part of what I always say is, but we have tenants that are on the margin. We deal a lot where we talk to the owners of the business.

And they lease 100,000 square feet from us. So although it's #6, for them to move across town to save $0.50 and $50,000 is a lot of money to them, it's going to cost them more than that to move.

Now in the same vein, this is like the one asset class where people aren't moving on up like the Jefferson's, right? They just - you have industrial space, it's class B, it's whatever the height it is. You get the flows dirty every day and you clean them at night.

So those tenants are not usually looking someday, we're going to move to a Class A facility and pay twice as much in rent. That's what I mean by the margin, right? So if that $100,000, $200,000 a year is coming out of someone's pocket, it's meaningful. So that's what I meant by contradictory. Hopefully, that makes sense..

No. Again, I think most of your tenants are fairly entrepreneurial and making small businesses work..

I would say a couple of the trends that we've seen is for companies that want to be near their suppliers or sister companies are - so there's some co-locating, so we see that people like in their space, they want to have their supplier next to them. So that's something we've been seeing plus they want to consolidate a little bit more.

We've seen some tenants move other locations into our facilities, plus we've seen a lot of tenants are looking for expansion space. They feel their business is going to grow. So when they're signing a lease, they're looking for rights of first opportunity on space that's adjacent to theirs or in the same building..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jeff Witherell for any closing remarks..

Yes, thank you. So thanks, everyone, for joining us. We appreciate the input. And if there are any follow-up questions, please reach out to us to Tripp Sullivan, and we're happy to discuss it. Thanks so much..

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