Earnings Transcript for INDT - Q4 Fiscal Year 2020

Operator: Good morning, and welcome to INDUS Realty Trust Fourth Quarter and Fiscal 2020 Earnings Webcast. [Operator Instructions] It's now my pleasure to turn the program over to Ashley Pizzo, Director Investor Relations and Capital Markets at INDUS.

Ashley Pizzo: Thank you, and good morning, everyone. Welcome to our fourth quarter 2020 earnings webcast. In addition to regularly available earnings materials, INDUS has also published a supplemental presentation this quarter, which is available on our website at indusrt.com, under the Investors tab. I would also like to mention that this conference call will contain forward-looking statements under federal securities laws, including the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates and projections about the market and the industry in which INDUS operates as well as management's beliefs and assumptions. Forward-looking statements may include, but are not limited to, expectations around shareholder value creation, business and growth plans, timing of those plans, impacts of external factors on our business and market expectations and expectations with respect to developments, acquisitions and dispositions, occupancy levels and the value of our landholdings. These statements are not guarantees of performance and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the risks listed in our most recent 10-K filing. Additionally, our fourth quarter results press release and supplemental presentation contain additional financial measures such as NOI, cash NOI same-property NOI, FFO, core FFO, cash core FFO, EBITDA for real estate and adjusted EBITDA for real estate that are non-GAAP financial measures. And in accordance with Regulation G and item 10 E of Regulation SK, we have provided a reconciliation to those measures in our published materials, which are available on the Investor page of our website at indusrt.com. This morning, we'll hear from Michael Gamzon, our CEO, who will cover recent activity, market conditions and updates in the development and leasing pipelines. We'll also hear from Anthony Galici, our CFO, who will cover the fourth quarter results in detail. With that, I'll turn the call over to Michael. Michael, will you please begin?

Michael Gamzon: Thank you, Ashley. Good morning, and thank you all for your continued interest in our company. We recently completed a series of exciting changes, including a corporate rebranding from Griffin Industrial Realty to INDUS Realty Trust and associated ticker symbol change to INDT, and our election to be taxed as a REIT starting this calendar year. I'll touch on some of these later, but before going into more details, I wanted first to thank the team at INDUS, whose efforts have been instrumental in our success over what has been a challenging and demanding year. We host this call nearly 1 year into the COVID-19 pandemic in the United States, and it is not lost on us that there still are many months left to weather. We hope that you and your families remain safe and well, and we will continue our commitment to the safety of our tenants, colleagues and stakeholders. We are fortunate to operate in a sector that has remained resilient thus far, and we have continued to experience strong occupancy and rent collection from our industrial tenants to close out the year. I'll keep the comments on COVID-related rent collection brief on this call, as we have not had any material updates since our last reporting period. To reiterate our previous announcements, we have signed agreements with only 2 tenants seeking rent relief. One was with a small 20,000 square foot tenant in Hartford, Connecticut, who is meeting its deferral obligations. The other agreement was with a subsidiary of a Fortune-500 company, who completed an early 5-year renewal under what you granted 4 months of rent at 50% in lieu of any other incentives we would have otherwise provided as part of a 5-year renewal with strong credit. Combined, these deferrals only accounted for 0.4% of fiscal 2020 revenue. As we move on to highlights from the fourth quarter and the year, I'll initially focus on our development activities. As previously announced, we have 4 projects in our development pipeline. 2 on parcels we own in the Lehigh Valley in Charlotte, and 2 that are on land and our contract to purchase, 1 in Lehigh Valley and the other in Orlando. Beginning with the 2 that we own. The first is a 103,000 square foot speculative warehouse facility in the Lehigh Valley, where construction is underway. On this project, we did experience some delays in receiving our final permitting due to COVID-related modified working environments in both the townships and the outside agencies. But I'm pleased to confirm that this is behind us, and we're back on track for our Q4 delivery. The Lehigh Valley continues to experience strong demand and absorption and the I-78, I-81 corridor in Pennsylvania continues to rank in the top-tier overall for new developments and total absorption. The other project is the 44-acre parcel that we own in Charlotte, where we have some exciting updates. We previously indicated that we secured entitlements to construct the RE speculative buildings totaling 520,000 square feet on that land. Subsequent to the fiscal year-end, under a preliminary agreement, we commenced the redesign of the site to accommodate a build-to-suit last mile industrial logistics facility for a leading e-commerce company. While the proposed building is slated for only 142,000 square feet, an extensive parking requirement would utilize all of the site's 44-acre development potential. We estimate that the total development cost for the project will be between $35 million and $45 million, including the land cost. And that's in the range of the development budget we underwrote for the original 3 building plan. Under the proposed terms, the tenant would enter into a 15-year lease for the property at a rental rate calculated as a percentage of the total project costs. I also comment that while this project is being constructed as a build-to-suit, if the proposed tenant were ever to vacate the property, we still could construct the 2 additional buildings we had originally designed on what is now the proposed parking areas, getting us back fairly close to our original site design. Switching to the land we have under contract. In the Lehigh Valley, we have 2 separate agreements to purchase a combined 23 acres of land of which we intend to develop a 206,000 square foot warehouse distribution facility. We expect to receive our entitlements and close on the land later this year and would seek to deliver the building sometime towards the middle of 2022. We also are under contract on 14 acres in Orlando, which we would expect to close on in the second or third quarter of this year, with plans to deliver 2 buildings totaling 195,000 square feet in the first quarter of 2022. The Orlando industrial logistics market, despite the slowdown in tourism in the hospitality sector, continues to experience positive demand, aided by the strong growth in population. We believe this project will be a great complement to our existing holdings in the market. All in, our development pipeline would add 646,000 square feet or 15% to our existing industrial logistics square footage upon completion, bringing our total industrial logistics portfolio to 4.9 million square feet. We expect the total cost for construction, inclusive of land site work building Shell and tenant improvements needed to stabilize these buildings will be $93.7 million, of which we have spent $11.4 million as of the fiscal 2020 year end. As a part of our standard development and acquisition underwriting process, we analyzed a targeted initial full year stabilized cash and NOI yield for each development project and acquisition target and then established a range of initial full year stabilized cash NOI yields, which refer to as underwritten stabilized cash NOI yields. We have underwritten the weighted average stabilized cash NOI yield from these 4 development projects to be in the range between 6% and 6.5%, which we believe provides a good margin compared to the market cap rates for these assets. I'd point you to our 10-K for more details on the methodology behind this calculation. We look forward to adding these developments into our portfolio into the incremental NOI contribution will receive as we lease them up. We also continue to actively evaluate acquisition opportunities of existing industrial logistics buildings which potentially can more quickly contribute to our in-place NOI. As reported by real estate brokers, the strong sector tailwinds have pushed pricing and demand for industrial assets in many markets to be equal to or higher than pre-pandemic levels. To compete, we will continue to make deep dives into a small group of target markets and identify opportunities that we believe will generate good returns over time. Our focus will remain on modern flexibly designed buildings of between 75,000 and 400,000 square feet in select markets with growing economies and population centers that are supply-constrained and that can service end uses from local delivery all the way up to national distribution. And we will utilize our development expertise to evaluate the full range of existing buildings from vacant and value-add up to fully leased properties. Next, I'd like to spend a moment on the vacancies in our current industrial logistics portfolio. As of November 30, we are essentially 100% leased in all but 3 buildings. The first 2 are 160 international drive, which is over 70% leased and 180 international drive in Charlotte, which remains vacant. Both of these were built on spec and delivered late in the fourth quarter of 2019. The third building is 170 some Portland in Orlando, which was a value-add acquisition and was only about 30% leased at the time we bought it in March of 2020. We recently completed an extensive renovation at 170 Sunport, which totaled a little over $13.50 per square foot. We are encouraged by the current tenant activity on all 3 properties. And are in some form of lease negotiations for all the major vacancies. We believe these assets will stabilize at rents above our initial underwriting. However, we note there's no guarantee we will execute these leases under the current terms, if at all. On the disposition front, we completed the sale of 140,000 square foot vacant office flex building during the quarter for $1.4 million, and we're still under 3 separate contracts to sell a total of 571 acres across land sites in Connecticut. You'll see these 3 land sites laid out in our materials as a $6 million sale to a potential solar user, a $5.4 million sale of our undeveloped Meadowood project to a land conservation organization. And a $0.9 million sale of our remaining residential parcels in a development called Stratton Farms. Last quarter, I announced that we were under contract to sell our 2 multistorey office properties, 5 and 7 Waterside Crossing, which totaled 161,000 square feet. Unfortunately, the buyer under this agreement did not complete the closing as planned, and we have relaunched the marketing process to sell these 2 properties. But sometimes when one door closes, another opens. And subsequent to the end of the year, we entered into an agreement to sell 91 acres of undeveloped land for commercial use in Southwick, Massachusetts. For a purchase price of $5.25 million. We would expect that this transaction will close in the second half of 2021, subject to the buyer clearing its due diligence and contingencies. Lastly, before passing over to Anthony, I'll highlight our 2020 corporate milestones. It was a busy year for us, and I appreciate their efforts and resilience of our team and they help getting us to where we are today. I'll start in February and March, when we announced the 2 acquisitions in Orlando to grow our footprint in that market. In March, we announced the addition of Gordon DuGan as Chairman of our board; and Molly North as a director. Both have provided valuable insights and guidance from their respective areas of expertise. In August, we announced an equity private placement and warrant issuance, raising a total of $27.2 million in proceeds. This transaction represented the first time that we've accessed external equity in INDUS' 23-year history as a public company and was an important step on our path to becoming a leading logistics real estate company. It also provided INDUS with a new partner, Conversing Capital, who shares our vision for growth and for increasing shareholder value. In October, we released our first quarterly supplemental information package demonstrating our effort to increase our disclosure and comparability of reporting to our REIT peers. In November, we hosted our first, albeit virtual, Investor Day and also participated in NAREIT's investor conference for the first time. In December through the start of this year, we completed our reincorporation as Maryland Corp., rebranded from Griffin Industrial Realty to INDUS Realty Trust and announced our REIT conversion effective for the 2021 calendar year. This is just a snapshot of some key highlights, but I'd also encourage you to review the additional information and disclosures and the supplement we issued along with the earnings release yesterday evening. With that, I'll turn it over to Anthony.

Anthony Galici: Thanks, Michael. Before I get into the fourth quarter results, I want to take a moment to remind you that along with electing REIT status in 2021, we changed our fiscal year-end from November 30 to December 31. This leaves us with a 1-month stub period in December 2020 for the transition between our 2020 fiscal year-end on November 30, 2020, and the beginning of our new calendar fiscal year, which began on January 1, 2021. The results of the 1-month stub transition period are expected to be reported no later than our quarterly report on Form 10-Q to be filed for the first quarter ending March 31, 2021, for our new fiscal year. An additional change to our disclosures that I will note is that we have renamed leasing NOI and cash leasing NOI to simply NOI and cash NOI beginning this period. This is in part due to a change in how we report asset sales. Historically, we included these revenues and related costs as individual revenue and expense line items in our income statement. Beginning with these year-end statements, we now show asset sales net, as a single item in other income and expenses. I will now provide a bit more detail on our fourth quarter financial results. Our industrial logistics portfolio was 94.3% leased at the end of the fourth quarter, unchanged from the third quarter. In terms of leasing activity in the industrial logistics portfolio this past quarter, we signed 5 renewals and 1 new lease, totaling approximately 498,000 square feet with positive leasing spreads on both a straight-line and cash basis at 13.3% and 0.5%, respectively. As we've mentioned in previous calls, we have addressed the majority of our 2021 leasing role. Our fourth quarter supplemental package shows approximately 454,000 square feet under leases scheduled to expire in calendar 2021 across the industrial logistics and office fledged portfolios. Subsequent to year-end, we signed a 1-year renewal with 1 tenant occupying 228,000 square feet was leased was set to expire in 2021, which accounts for over 50% of the 2021 expiring square footage. There are 2 remaining industry leases with expirations scheduled for November 30 and December 31 this year, 1 in Charlotte, the other in Hartford, totaling approximately 166,000 square feet. For additional information, these disclosures on our tendency and future lease role by year in our supplement. Our industrial logistics cash NOI was $5.5 million for the fourth quarter, up 5.1% from last year's fourth quarter. For the year, industrial and logistics cash NOI was up 9.3% from $19.7 million in 2019 to $21.6 million in 2020. Industrial logistics cash NOI benefited from the addition of the 3 acquisitions in the Orlando, Florida market, the initial lease-up in 1 of the spec building in North Carolina, and to a lesser extent, improved occupancy in the existing portfolio, notably, the lease-up of Griffin's most recently completed building into Lehigh Valley and increases in rental rates. These benefits were partially offset with free rent periods from new and renewed leases completed earlier this year, which impacted cash NOI by about $414,000 during the quarter. The majority of this free rent impact related to a renewal and expansion of a lease with a tenant that tripled it's space to 300,000 square feet and required very little in tenant improvement costs. Our office/flex portfolio totals approximately 393,000 square feet and makes up 8.5% of our portfolio by square footage. This total reflects the 40,000 square foot disposition of 55 Griffin Road South in the fourth quarter. As Michael mentioned, we have relaunched our marketing process for 5 and 7 Waterside Crossings. We expect the office/flex percentage of our portfolio to continue to decrease as we grow our industrial logistics portfolio. Our office portfolio was 71.3% leased at the end of the fourth quarter. We anticipate that occupancy in the office/flex properties will remain challenged, especially as companies continue to rethink their space needs and delay making any long-term commitments as a result of the pandemic. In the fourth quarter, we took an impairment charge of $2.1 million related to 5 and 7 Waterside Crossing, reflecting a recent third party valuation. This impairment brings the book value of 5 and 7 Waterside more in line with what we believe to be market value of the buildings based on a former agreement for sale at $6.25 million, which we have noted was subsequently terminated by the buyer in the fiscal 2020 fourth quarter. General and administrative expenses increased to approximately $10 million in fiscal 2020 from approximately $7.7 million in fiscal 2019. A significant part of this increase was tied to $1.4 million in expenses, primarily legal fees, related to our decision to operate as a REIT effective on January 1, 2021, and similar growth initiatives. In 2020, INDUS also had an increase in incentive compensation and stock option expenses the largest portion of which related to the onetime grant of options provided to DuGan when he became Chairman. We also incurred an increase in G&A from legal fees related to new leases that were expensed in fiscal 2020 and instead of capitalizing those costs as had been done previously, as required under the new lease accounting standard that INDUS adopted at the start of fiscal 2020. These expenses added $166,000 to other G&A in the fiscal 2020 period. I will also refer you to Page 13 of our fourth quarter supplement, where we have provided additional details on our G&A expense. As it relates to G&A, for 2021, I want to point out 2 items. The first is that we will continue to experience expenses related to our reconversion and corporate organization, particularly, in the first part of the year. We will continue to show these expenses in our 10-Q and supplement. The second is that we will change the accounting for our construction and development personnel and where appropriate, we'll capitalize their costs, which is mostly compensation. Into the projects they work on rather than fully expense their costs in G&A. We believe that this treatment is consistent with most of our peers. We estimate the amount capitalized could approximate $300,000 million to $400,000 per year, although this number is subject to a number of conditions. This is the second quarter where we have shown an income statement expense called change in fair value of financial instruments, which reflects changes in the fair value of the warrant and contingent value rights that were issued as part of the private placement that was completed this past August. For fiscal 2020, this showed up as a $6 billion expense on the income statement. As a reminder, there were also liabilities associated with the warrant and continued value rates recorded on the balance sheet as they are being classified as derivative financial instruments under ASC 815-10. It's worth noting again that despite the accounting treatment of the warrant liability, the maximum amount that INDUS would be required to pay if the warrant, which should be settled in cash, is $2 million. I also will note that these liabilities will go away upon the first anniversary of the private inflation, which will be prior to the end of our 2021 third quarter. As we will elect to be taxed as a REIT in 2021, we are continuing the disclosure of additional metrics that we typically report. In our supplemental presentation, we calculated non-GAAP measures such as EBITDA for real estate, adjusted EBITDA for real estate, FFO, core FFO and cash core FFO. As of this quarter, we have also added a calculation of trailing 12 months' same-property NOI growth for the industrial logistics portfolio. I will point you to the appendix section of our supplemental presentation for our definitions of these metrics and reconciliations of these metrics to the appropriate U.S. GAAP amounts that can be found on Slides 7 through 10 of the fourth quarter supplement. I will begin with same-property NOI and cash same-property NOI, which are calculated, consistent with NOI and cash NOI on a property level basis. The difference is that the property portfolio for the purposes of same-property calculations is limited to those industrial logistics properties which have been owned and part of our stabilized in service portfolio both the current and prior year reporting periods. For the year ended 2020, all properties in the same-property portfolio needed to be owned and stabilized as of December 1, 2018, in order to be included. This limits our same-property portfolio to 80% of our current industrial logistics assets. Growth in same-property NOI and cash same-property NOI was 3.1% and 2.9%, respectively, for fiscal 2020 over fiscal 2019. Our cash same-property NOI was most impacted during the trailing -- stoped it again. Our cash same-property NOI was most impacted during the trailing 12 months ended November 30, 2020, by free rent associated with 2 transactions, which accounted for over 7% of the square footage of our same property portfolio. Looking forward, we believe that future near-term property growth is limited to renewals and escalations, and the same-property portfolio is 100% leased as of year-end. With the tanker for swings as a result of abated rent and the normal cost of leasing activities as was the case in 2020. I will also note that we don't expect same-property NOI to capture the benefit from lease-up of newly developed properties as we will not include properties in the same-property portfolio until stabilize both the current and prior year periods to be consistent with our peers. The other metric I would like to focus on is core FFO. We have defined FFO consistent with NAREIT FFO plus the add-back of income taxes. Core FFO goes 1 step further from FFO to adjust for 2 relatively chunky expenses in 2020, which are either noncash or nonrecurring that is G&A expenses related to REIT conversion costs, which I mentioned earlier, was $1.4 million for the year as well as the change in fair value of financial instruments that I mentioned earlier was $6 million for the year. Core FFO was up 6.2% in 2020 over 2019 after adjustment for those nonrecurring and noncash charges to $11 million from $10.4 million in 2019. The growth in core FFO was driven by higher NOI for regions that I mentioned earlier, but was offset by higher interest expense principally related to borrowings to finance a portion of the cost of the recent acquisitions in Orlando. Our capital expenditures for fiscal 2020 totaled $11.3 million and consisted of $1.8 million for development costs and infrastructure improvements, principally reflecting design costs related to our 103,000 square foot and 142,000 square foot developments in the Lehigh Valley in Charlotte; $8 million in tenant and building proven related to leasing, $3.2 million or 40% of which was for first generation space and $1.5 million in new building disruption, including side work, which were primarily related to final payments of the construction costs for 160 international and 180 international. As of the end of fiscal 2020, we had approximately $63 million in liquidity, comprised of $28.5 million of cash on hand and $34.5 million available on our 2 revolving facilities with Webster Bank. Subsequent to the end of fiscal 2020, we have agreed to terms with Webster Bank to add 160 international drive and 180 international drive in Charlotte to the collateral pool and increase the availability of the Webster credit line from $19.5 million to $35 million, subject to receipt of final appraisals of the under new collateral by Webster, amongst other items. Combined with our $15 million acquisition credit line, total borrowing capacity under both facilities is expected to increase from $34.5 million to $50 million in the aggregate. Our credit facilities with Webster Bank mature on September 1, 2021, and contain an option to extend for an additional 12 months, subject to certain conditions. Beyond the credit facilities, we have very limited near-term debt maturities. The only other debt maturity prior to 25 consists of an approximate 4.1 million mortgage on our 2 multistorey office buildings, 5 and 7 Waterside Crossing, which are being marked for sale, as previously mentioned. One more update as it relates to liquidity and our future liquidity for INDUS. On February 2, we filed a universal shelf registration statement on Form S3 with the SEC. Under the universal shelf, INDUS may offer and sell up to $500 million of a variety of securities, including common stock, preferred stock, warrants, depository shares, units or any combination of such securities during the 3-year period that commences upon the effective date of the universal shelf. As of the date of this call, the shelf has not yet been make -- effective, and we cannot make any guarantees that we will be able to issue under the shelf at favorable terms or at all. I will wrap up by just briefly touching on our overall leverage metrics. As we develop most of our portfolio over time rather than through recent acquisitions, we believe that the book value of our buildings, which reflects substantial accumulated depreciation and significantly below their market value on an aggregate basis. We also have land holdings that we believe our worth significantly more than book value and generate little earnings. I refer you to Page 35 of this quarter's supplement for details on our undeveloped land holdings. Additionally, we recognize that due to our current size, our G&A expenses comprise a much larger percentage of NOI than our peers. The combination of these factors impact our book value and income based leverage metrics. We believe that debt-to-enterprise value, which currently stands at approximately 31%, is a useful metric to evaluate our leverage. For additional leverage metrics as well as a complete schedule of our debt, I point you to Slides 26 through 28 in this quarter's supplemental presentation. In summary, we believe we are operating with comfortable levels of indebtedness for a company of our size, but we also note that we have most of the infrastructure in place to support future growth of our portfolio and expect to be able to better leverage these infrastructure expenses going forward, which should flow through to our overall debt-to-EBITDA and other metrics. I will now turn it back over to Ashley for some closing remarks.

Ashley Pizzo: Thank you, Anthony. For our listeners, we appreciate your time and interest in INDUS Realty Trust. This concludes our fourth quarter and fiscal 2020 earnings call. But as always, we are available for follow-up questions via phone or e-mail at the contact information listed on our website, www.indusrt.com.

End of Q&A: