Good morning. Welcome to the Plymouth Industrial REIT Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that 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, Kate. Good morning. Welcome to the Plymouth Industrial REIT conference call to review the company’s results for the third 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 here today. While our second quarter was primarily defensive in nature, our third quarter was one where we are continually active on offense and our results reflect that work.

Rental collections and leasing activity have both continued on the positive trajectory we had coming out of the second quarter. Also during the third quarter, we completed another overnight common equity offering, which we are actively deploying the proceed on.

Continuing along with a sports metaphor, I’m often saying that we here Plymouth playing a team sport, and as such, we need to feel the best team we can. We have worked hard at building a strong foundation in each area of our business and our results over the past several months are a direct result of that effort.

I want to thank every one of my team members who continue to put in the work to make this happen..

Good morning. Considering the pause button on a number of acquisition opportunities we were pursuing back in March and April, our focus has been enhanced in our pipeline with transactions from motivated sellers.

We also wanted to replicate what we’ve done in the past, first, attractive entry points to new markets, find select opportunities to acquire B plus or A minus properties at Class B pricing and target new deals in infill locations near major urban areas. We’ve been successful on each initiative during the quarter and that momentum has continued.

With proceeds from our August equity offerings we were able to deploy our capital efficiently and prudently, completing three separate transactions in September, totaling $51 million in St. Louis and Jacksonville markets where we have a growing presence. We now have over 750,000 square feet in St Louis and over 1.4 million square feet in Jacksonville.

In October we purchased another property in Ohio for $10.5 million and completed $150 million equity joint venture agreement with Madison. These additions in our existing markets in St.

Louis, Jacksonville and Ohio extend our scale in each market with well tenanted properties that provide the opportunity to drive rental rates on renewal and generate incremental value. They are a mixture of Class A minus and Class B properties, and they are positioned to benefit from the strong fundamentals in these markets.

There are new markets we are pursuing as well, where we believe we can attain attractive entry points that look similar to our existing asset base.

Regarding the Madison JV, Jeff, had some comments earlier on this, but I want to reinforce how we are approaching this venture from an investment standpoint and briefly mentioned the first acquisition we have under agreement.

For the last few years, we have seen a number of large portfolio transactions to trade in our target markets and seeing deals that are more value-add or opportunistic in nature, i.e., not a good fit for the REIT at that time.

Now, with Madison, as a committed partner, we have the opportunity to push scale in our target markets, an extent we have not been able to do in the past. For instance, our first opportunity is in Memphis, the market we’re very familiar with.

There we have under agreement the 28 building, 2.3 million square foot portfolios for approximately $86 million. We know this property is very well and many of them are in close proximity to our existing assets in the market.

And Memphis is a top industrial market with multiple demand drivers tied to logistics and distribution, along with a strong manufacturing base..

Good morning. As of September 30th, we have addressed 82% of our leases that were due to expire in 2020. In addition, we have already addressed 29% of the forecasted 2021 expirations. During the third quarter, 16 leases commenced totaling 480,000 square feet.

Of this amount 242,000 square feet was for leases six months or longer, which was comprised of 102,000 square feet of renewal leases and 240,000 square feet of new leases. Overall, we had a 14% increase in rental rates on a cash basis over prior leases with duration over six months.

During the nine months ended September 30th, leases for space totaling 2.5 million square feet were either subject to renewal or expiring. Of this space, 1.6 million square feet or 62% was renewed and 400,000 square feet or 18% was leased to new tenants. Additionally, 200,000 square feet, a previously vacant space was leased to new tenants.

Overall, for the first three quarters of 2020, we had a 12.1% increase in rental rates on a cash basis over prior leases with a duration of over six months..

Thank you, Jim. We posted strong third quarter results despite the near-term headwinds on same-store NOI that we discussed last quarter. We’re making progress on the releasing with some vacancy in the same-store portfolio and burning off the three ranks from some of those leases.

Consistently high rent collections within the portfolio and the leasing momentum we’ve sustained, not to mention, the continued execution on our acquisition opportunities gave us the visibility and the confidence to reinstate our full year guidance. We also made significant progress on our balance sheet and I’ll discuss each of those in more detail.

First, let me cover a few items of note for the quarter. Significant year-over-year acquisition activity grows revenues, NOI, EBITDAre, FFO and AFFO. We had only a partial month contribution from the $51 million of acquisitions completed in Q3 that impacted the quarter. FFO and AFFO available per share and unitholder were $0.42 and $0.38, respectively.

After the impact of the additional shares and a decline in same-store NOI, offset the impact from the office acquisition. We’re also required to record $311,000 non-cash impairment related to the carrying value of the right of use assets associated with primary lease on our primary headquarters offices.

We have more detail on this impairment in the footnotes on our -- of our 10-Q and there are already -- several these have already been in the reporting season. But there’s a classic gap requirements, leading to some headline confusion.

Adding back the $0.02 of non-cash charge to reflect actual operations for the quarter, we’ve got a yield of $0.44 in FFO for the quarter fell down sequentially from Q2. G&A in the quarter increased year-over-year due to additional professional fees and also for occupancy costs as we bring the transaction to our new office at 20 Custom House Street.

In the subway agreement, which we executed for our prior space was being delayed due to the Coronavirus concerns of the subtenant. G&A includes approximately $324,000 of non-cash expense representing amortization of stock compensation that is an adjustment to AFFO and approximately $154,000 of non-cash expense related to the occupancy timing.

During the quarter, we raised approximately $104.5 million in net proceeds from our equity offering. And with this offering, we’re able to make substantial reductions in our leverage and expect to be able to operate with a lower assumption of leverage than in years past when applying those proceeds to acquisitions.

We are assuming we will deploy these proceeds with 1% leverage, compared with 50% to 55% leverage from previous offers. At quarter-end, we had nearly 80% of our debt in place with fixed interest rates at approximately 4.1% for the next two year to eight years.

Balance represents borrowings outstanding on our term loans with an applicable interest rate at September 30th of 2.41%. There were no borrowings on our credit facility at quarter-end as we used $70 million of our offering proceeds to pay it down to zero.

Our leverage as of September 30th was 14.8% based on debt-to-gross asset value, compared to 49.7% at the end of the second quarter. Our net debt to annualize adjusted EBITDAre was 5.9 times and 8.2 times when we include debt and preferred stock. These are down from 6.3 times and 9.5 times respectively from a year ago.

This is a meaningful reduction in leverage. Our goal is to bring our net debt plus preferred down by two to three times of leverage over the next few years and this recent offering gives us the opportunity to take a turn or two-off leverage over the next year or so.

As of November 5th, we had approximately $12.6 million in operating cash, plus operating expense escrows for real estate taxes and insurance, totaling approximately $7.7 million. In addition, we had availability on our minor credit of $111 million.

Consistent with our previous statements, we took care of our own material debt maturity until 2020 subsequent to quarter end. We closed on a $300 million of unsecured credit facility led by KeyBanc. This will comprise a new $200 million revolving credit facility and a new $100 million loan will mature in 2024 and 2025, respectively.

In addition to substantial increases in availability, we continue to bring down our borrowing costs with a 50-basis-point to 55-basis-point reduction in our pricing matrix. We’re also able to negotiate this facility on an unsecured basis.

The unsecured structure gives us greater flexibility and efficiency going forward and is a major achievement in strengthening our balance sheet. Jim noted earlier that we’ve done a great job on collecting mill rents with occupancy remaining stable and leasing momentum continued.

With the ability to collect 99% of our rents in last three quarters and an improved visibility of our acquisitions and capital markets, we have decided to reinstate our full-year 2020 guidance. For the year, we are now expecting FFO to be in the range of $1.83 to $1.85 per share in unit outstanding.

If we add back the $0.02 associated with leasing impairment I noted earlier that would be $1.85 to $1.87. For AFFO, we are now anticipating $1.65 to $1.67 for annualized dividend payout of only 48%. We have provided non-GAAP reconciliation in our earnings release supplemental along with accompanying assumptions.

The major assumptions include the completion of $105 million of acquisitions before year-end, which obviously will only have a small impact on the fourth quarter. Higher G&A associated with increased headcount to support our continued growth and professional fees and expenses with compliance reporting, along with lower recurring capital expenditures.

We’re in good shape to execute on the opportunities Jeff and Pen have described earlier, and we’ve made substantial progress on reducing our leverage while ensuring access to capital to support growth. As Jeff mentioned in his remarks, this has been a team effort, as we have adjusted to working both remotely and on site.

The efforts of our staff and the coordination of the various professionals is to be commended. I will be happy to answer any additional questions on this commentary during Q&A. And Operator, we are now ready to take questions..

Our first question is from Craig Mailman from KeyBanc Capital Markets. Go ahead..

Hey. Good morning. Just one clarification, the April move out, I think you said, Stonecrop.

How big is that?.

Stonecrop is 528,000 square feet..

So that’s going completely dark.

How --what is kind of the underwriting assumption there on the back so?.

We only expect that our assumption is three months vacant, we’re already marketing the space. We actually have waiting on an RFPs right now. Stonecrop is working with us. They’re basically shutting down operations this month and allowing us access to the building.

So if we have a tenant sooner, we’ll just terminate their lease and move the new tenant in..

Okay. Great. Thanks.

And then just moving to the joint venture, Jeff, could you maybe just provide a little bit more detail about what type of threshold there is for the Plymouth timing of when you come into that opportunity? And just -- also just kind of, I guess, bridge the gap here, you guys are trying to lower leverage to 40% of the incremental that you guys are using about 65% of debt in the JV? Can you kind of just reconcile that for us?.

Sure. Yeah. I didn’t the first part of it. You talked about timing.

I don’t know what you’re referring over there?.

Oh! Sorry.

Of the Plymouth, like when do you guys would -- what triggers would Plymouth, kind of what’s the threshold from a return perspective? Just a little bit more detail on just how easy that that hurdle or difficult maybe for you guys to hit?.

Right. So, I mean, obviously, we don’t really envision too much of the Plymouth on a cash flow basis, right? I mean, if your cash flow gets up to 15% on our equity will be in the Plymouth, but we’re not underwriting that necessarily for us in our model. But Pen do you have..

No. That’s right. That’s adequate. Not to go into whole lot of detail. But we are -- the timing is a little bit unknown, because we don’t know until we actually sell the properties. So we’re just in the beginning stages of this on that. But the thresholds are the first Plymouth kicks in at 12% for us.

And we will -- not to be cryptic here, we just said, we prefer to get the details out when we actually close on the property in case anything changes. You’ve got the structure of the JV, which allows for the asset management fee, it allows for a Plymouth structure to us. Now that could be tweaked, right, as the deals come up and we close on a deal.

So we just -- on purpose, we just didn’t put out a lot of detail on the methods property. There are things that we could be working on behind the scenes that will affect that deal after we close. Hypothetically, you could sell off the building and the things that could go on that could change it right up until closing.

So we just didn’t want to get out ahead of ourselves and give out all these details that could change. We really don’t think much is going to change, but we just try to be conservative. That’s helpful….

So there is no blanket for Plymouth, it’s deal by deal the Plymouth can change?.

No. What I’m saying is that the JV has been negotiated, so that we have our asset management fee and we do have a Plymouth that staggered based on return metrics. What I’m saying is that, that’s in writing, that’s solid, that’s there, it’s been negotiated. But depending on a deal, if the deal comes in, we need to change it a little bit and tweak it.

We’re certainly happy to do that and be flexible. We don’t engaging that to happen, but it certainly could. We did not have that type of a partner..

Okay. And then just on the leverage in the JV versus kind of on balance sheet decision there to use the higher LTVs..

Yeah. We believe that the slightly higher leverage on the JV level is beneficial. And at the time, if we ever got to the point where we exercise and like first offer on obviously built into the JV agreement, we would revisit the average basis for that particular property based on the value at the time of the transaction..

Okay.

I’ll look through base yourself if that the JV gets the full 430 kind of what do you think? What do you think the impact could be if you guys can you ever deal at 40%, kind of what’s the net impact of that higher leverage on that, because it’s significant relative to the size of the company today at full investment, right?.

Yeah. I mean, it’s 20% of the equity, right? So when we have 20% -- we would take 20% of the debt..

Correct. Our proposition is 20%, and obviously, looking at down the road, it doesn’t automatically mean that if the investment were to be liquidated and sold, it doesn’t automatically flow back to Plymouth, it could be going to an independent third-party, and therefore, your returns will be separate..

Okay. And then just one last one for me, as you guys think about the two buckets of value-add or too big for balance sheet.

Is there any different -- difference in return thresholds, you guys would want to go into the JV versus keeping a balance sheet?.

Yeah. And I think by definition, these deals are going to be higher IRR, right? The goal is to sell it in cash of IRR.

I mean that’s what all the private equity partners want, right? So, by definition of value-add, anything that’s kind of opportunistic that we can do, this particular deal Memphis is, there’s a lot of CapEx and that CapEx needs to be managed correctly over time.

And there’s some leasing to do, there’s some role, there is -- as I said, there is potential to rejigger the portfolio a little bit. And that’s all going to create pretty good returns, good IRRs that -- are different than what’s in the REIT necessarily..

Is there like a target like 200-basis-point or 300-basis-point premium for taking on that value-add risk at that scale or is it just higher CapEx that goes into the JV automatically?.

Yeah. Craig, you are right. A very general mark our target IRRs in the JV, are kind of in the mid-teens whereas in the REIT you’d expect that to be a little bit less..

Awesome. Thank you, guys..

Thank you, Craig..

Our next question is from Gaurav Mehta from National Securities. Go ahead..

Yeah. Thanks. Good morning. Following up on JV, I was hoping if you are able to provide any color on the Memphis acquisition that’s under contract.

How is that deal closed? What kind of vacancy are you guys looking at and what’s the initial cap rate on that acquisition?.

Yeah. We haven’t close on this deal yet. We expect to within the next 30 days. So that time we can provide more specific information..

Yeah. Gaurav, we just don’t want to get out ahead of ourselves and start modeling things. Have you guys spent all this time on if the deal might get tweaked, right? We just don’t think that -- we’re not really superstitious around here.

But we just don’t think, we’re still tweaking some things, making some changes, and as I said, something could happen right after closing that might change the dynamics. I don’t really want to get into it on open call..

Understood.

That’s fair? And I guess, as you guys are sourcing that acquisition for the JV, how involved is Madison in sourcing those deals?.

I didn’t hear the last part, but I just heard about sourcing or how involved, we work together. We’re….

But that’s why they have us. I mean, that’s they’re an international capital provider. And I think if you look at the press release, Ron Dickman is the President of the firm and has expressed to the world that he believes in the Plymouth platform. As I mentioned on the prepared remarks, they’re one of our largest common stockholders as well.

So we don’t think we could have found a better joint venture partner whose interests are aligned with the REIT across the spectrum. So we look at this as a win, win. But they are -- that’s why we’re doing this. So hopefully it’s not get lost. These deals are in our markets. They come to us. They have been coming to us.

We’ve got people on the ground in some markets and we want to take advantage of that. And provide opportunities for the REIT, think about bringing this particular portfolio into the REIT in the future. There’s no transaction cost, we’ve already been managing it.

I mean, if we decide to bring in a joint venture property, I think you can rest assured that we’re 110% on board on that property if we bring it..

Okay. Thank you. that’s all I have..

Okay..

Thank you..

Our next question is from Barry Oxford from D.A. Davidson. Go ahead..

Great. Thanks. Dan, I think this is for you.

How should we think about your bad debt expense going forward?.

Say that again, Barry. Good to hear..

Bad debt expense going forward?.

Okay..

We think we have got a relatively under -- really under control.

I think our experience on bad debt has been minimum, right?.

We just don’t have much at all? I mean, that’s as of right now. And I think we touched on it any of these deferrals and we were collecting 99% plus of our rent..

Jeff, when would those deferrals be fully collected by 3/31 or 6/30?.

At this point, we’ve already collected well over 50% of the deferrals. And we expect to have significant portions of that collected by year-end with only a handful sliding into January, February next year..

Okay. So you’ll have full collection fairly quickly over the next few months..

Absolutely..

Yeah. Great. Great.

And then just big picture question from an acquisition such as pricing, over the last few months have there been any real changes in cap rate, my guess is, if anything, they’ve gone down? And then, second, the volume of inventory that you guys have seen for sale has that changed over the last couple of months?.

Yeah. Barry, I do your first question first regarding….

Yeah. Yeah..

… cap rate. We have seen cap rate compression in the last few months. And not just in the primary markets, but we’re seeing some in the secondary markets and kind of anywhere from 10 basis points to 50 basis points. I think we see that more in single asset properties versus multi-tenant where there has been minimal change in the cap rates.

But naturally each market is different and that’s why we do what we do. We’re working in a very fragmented marketplace as you know. But as a general comment, we have seen some compressions, a lot of capital chasing industrial these days for all the reasons that you know..

Right..

So volume of deals, it’s little bit low, I guess, in the summer time and the COVID didn’t help. But since Labour Day, we’ve definitely seen a tick up on the amount of deals that have surfaced in the market. So it’s still -- it’s quite active.

I can tell you right now, I and our team are -- we’re busy 24x7 going through a fair amount of deals and our pipeline is over $360 million right now and we’re busy. So that’s a good sign..

Right. No. Great. I just want to make sure there’s enough for you guys to look at..

Yeah..

Perfect. Thanks, guys. Appreciate it..

Thanks, Barry..

Our next question is from Connor Siversky from Berenberg. Go ahead..

Hi, everybody. Thank you for having me on the call. First question a little high level, seeing some reports, showing a restriction in shipping capacity as we approach the end of the year and to 2021.

And I’m just wondering if there are any conversations with your tenants related to that and if you think this could affect leasing going into next year?.

Jim, you got any insight to that?.

We have not had any conversation about restrictions with our tenants. And we do not see a slowdown on leasing going into next year. We’re already working on -- the majority of the first half expirations with tenants..

Okay. Okay. And then one other just on disposition, I’m wondering if you’re seeing any opportunities out there to engage in some capital recycling into 2021.

Maybe use that as a way to bring down leverage incrementally?.

Yeah. I mean, I think, first off, we’re bringing down leverage. We’re $300 plus million market cap REIT and I don’t think there is another REIT in our universe that has the leverage profile we have. We have a significant spread between the cap rates we bought and we’re leveraging sub 3% on our facilities.

Look at where our net debt-to-EBITDA projections are, sub-7 could be low 6s, that we don’t see any issues with that. Look at -- if you look at where our gross assets at work and look at where all leverage is, sub-50% on that and we will continue to drive that down over time and because of the spread that works.

Selectively, there are certain dispositions. We will track record out there in the REIT space, that is very bifurcated, where you have people that have tried to go out and sell their higher cap properties to go buy low cap properties, sometimes it works, a lot of times it doesn’t work. Our focus is we’ve got capital to deploy.

So recycling capital, I don’t think is really a big issue, we could have a lot of things we could do. You may see some select sales or properties. We review that all the time. Our lot of our properties are generating 14%, 15% on cash.

So I’m not so sure anybody in real estate business is going to be able to do that in the next three years or four years is to recycle and into that type of property. So we’ve got good properties, they’re not obsolete, good tenants. We think they’re going to renew, that’s part of our business.

We’re -- that’s one of our strong points is the ability to forecast for the most part, who is going to renew, who isn’t and we think that that’s going to work out really well for us. So we’re at 15% on cash, we think we’ll be going up to 16% to 17% on cash. So the kind of long winded answer to that. We think the leverage is great.

And you certainly could see some select sales. What happens a lot of times is, older users would kind of approach us and want to buy out a facility. They seem to -- their return thresholds are a lot different than other people. So they’ll pay a lot more money for a property, especially if they’re using it.

If they’re going to put significant capital into the property or what have you. So you might see some of that happened with us..

Okay. Appreciate the color. That’s all for me. Thanks, guys..

Yeah. Thank you..

Our next question is from Dave Rodgers from Baird. Go ahead..

Hi, guys. This is Nick on for Dave. I just have one quick question. Thanks for that clarity on the Stonecrop property. But I think we’ve talked in the past about Mason Kean is 20 -- June 2021 expiration. I think you guys mentioned that it’s been like subleased and you guys are hoping to go direct with one of the tenants there.

I was just wondering if you guys have any updates there?.

So the Mason Kane space is roughly 350,000 square feet. They expires in June. They have the space fully sublet to two tenants, one of which we’ve already done a seven-year deal with once Mason Kane expires for 172,000 square feet.

And the remaining square feet is what the tenant that wants to do a lease with us in it and they did -- but they want to wait until the beginning of the year. They off because they not sure exactly what size they want. They may take on to another piece of the building as well. So they could be in you know 170,000 square feet to 300,000 square feet..

Okay. Great..

So half is done and the other half is still in the works..

Okay. Great..

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

Thank you, Kate. Thank you all for joining us this morning. As always, we’re available for follow-up questions throughout the day. We’ll talk to you again soon. Thanks..

The conference has not concluded. Thank you for today’s presentation. You may now disconnect..