WPT Industrial Real Estate Investment Trust (WPTIF) CEO Scott Frederiksen on Q3 2020 Results - Earnings Call Transcript
WPT Industrial Real Estate Investment Trust (OTCQX:WPTIF) Q3 2020 Earnings Conference Call November 12, 2020 10:00 AM ET
Company Participants
Scott Frederiksen - Chief Executive Officer
Matt Cimino - Chief Operating Officer
Judd Gilats - Chief Financial Officer
Conference Call Participants
Mike Markidis - Desjardins
Matt Kornack - National Bank Financial
Himanshu Gupta - Scotiabank
Operator
Good morning, ladies and gentlemen, welcome to WPT Industrial REIT's Conference Call. This conference call is being recorded.
Before we begin, let me remind everyone that during this conference call, management may make statements that contain forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. We direct you to the company's earnings release, MD&A and other securities filings for additional information about these assumptions, risks, and uncertainties.
Now that the formalities are out of the way, I would like to turn the meeting over to Scott Frederiksen, Chief Executive Officer of the REIT. Please go ahead.
Scott Frederiksen
Thanks, Keith. Good morning and thank you for joining us. With me today are Judd Gilats, the REIT's CFO and Matt Cimino, the REIT's COO. Before we dive into our detailed results, I want to provide a few high-level comments on the quarter and the U.S. industrial markets more generally. While broader uncertainty, whether from COVID-19, geopolitics or otherwise continues to impact and influence the overall U.S. economy, we've seen increasing strength in U.S. industrial market and continued cap rate compression in most of our investment markets, as reflected in our own strong operating performance and increases in the fair value of our portfolio.
And looking ahead to the remainder of this year and into 2021, we expect to see continued positive momentum on the leasing front with discussions actively underway on a number of larger renewals and expansions and accelerating growth in our private capital platform.
With that preview, I'll now turn things over to Judd to discuss the REIT's financial results in more detail. Judd?
Judd Gilats
Thanks, Scott, and good morning everyone. Before I begin, let me remind everyone that all figures discussed today are stated in U.S. dollars. Total investment properties revenue for the 3 and 9 months ended September 30 increased 55.5% and 47.7% over last year, primarily due to 2019 and 2020 acquisitions with additional contributions from increases in base rent.
The REIT also earned management fee revenue of approximately $900,000 and $1.3 million in the quarter and year-to-date, respectively as we saw increased construction management fees in the third quarter. Net operating income for the 3 and 9 months ended September 30 was up 52.2% and 45.0% from last year. Same properties NOI, while impacted by 2.4% reduction in occupancy, was up 1.7% and 1.8% for the 3 and 9 months, driven mainly by favorable releasing spreads and contractual rent increases. G&A expenses for the 3 and 9 months excluding any fair value adjustments were approximately 3.0 and $9.3 million.
FFO and AFFO for the quarter were up 48.7% and 43.5%, respectively. FFO and AFFO per unit were $0.253 per unit and $0.197 per unit, respectively. Both FFO and AFFO were mainly impacted by acquisitions in 2019 and 2020, increases in base rent in the legacy portfolio and by a reduction in general and administrative expenses from the prior period. Offsetting these increases were reduction in management fees attributable to a variation in in-promote income, a reduction in occupancy and the impact of a 41.3% increase in the weighted average number of units outstanding compared to the same period last year.
Our ACFO payout ratio for the quarter and year-to-date were 80.9% and 96.2% compared to 90.3% and 99.6% in the same period last year. ACFO payout ratio was directly affected by the timing of equity financings in October 2019 and February 2020 relative to the deployment of those equity proceeds. At September 30, our balance sheet and liquidity position remained strong with cash on hand of $19.5 million and remaining availability on the credit facility of approximately $156.5 million. Reported leverage on our balance sheet net of cash on hand is 47.4% with debt-to-adjusted EBITDA ratio of 9.0x.
During the quarter, the REIT also completed the following notable transactions. On August 28, the REIT sold the investment property located at 1370 Discovery Industrial Court to a third party for net cash proceeds of approximately $10 million. The proceeds from the sale were used to repay indebtedness. Also on August 28, the REIT contributed a land parcel in Eagan, Minnesota into a private capital joint venture for a combination of cash and equity interests in the new venture. The REIT is developing a distribution building totaling approximately 200,000 square feet on the property on behalf of the joint venture. On September 3, the REIT contributed a land parcel in Houston, Texas into a private capital joint venture for a combination of cash and equity interests in the new venture. The REIT is developing an industrial building totaling approximately 500,000 square feet on the property on behalf of the joint venture.
Following the end of the quarter, the REIT's private capital development projects in Walton, Kentucky was sold to a third party with the REIT receiving in-promote in connection with the sale. Inclusive of the Walton promote and assuming the REIT receives no other promotes in 2020, we currently expect private capital fees for 2020 to end up between 2.8 and $3.3 million depending primarily on the timing of construction management fees in the quarter.
As Scott mentioned earlier, we expect our deployment activity to continue to accelerate in - our development activity to continue to accelerate in 2021 and currently expect private capital fees for 2021 to end up between 7 and $10 million for the year.
I'll now turn things over to Matt to provide an operations update.
Matt Cimino
Thanks, Judd. Good morning, everyone. Similar to last quarter, I'll start with some updated rent collection numbers and then turn to quarterly leasing activity and a private capital update. To date, we've received over 99% of contractual rents for October and November, which remains consistent with Q3 collection rates.
Turning to leasing activity, the REIT had 260,000 square feet of new leases and 1.4 million square feet of lease renewals commence in the third quarter. Lease renewals commencing in the quarter had a weighted average cash releasing spread and straight-line rent releasing spread of 12.2% and 20.1%, respectively. We also signed approximately 700,000 square feet of lease renewals in the third quarter with a weighted average cash releasing spread and straight-line rent releasing spread of 15.9% and 21.3%, respectively. As of September 30, the REIT had approximately 196,000 square feet or 0.6% of the portfolio's gross leasable area set to expire in 2020 and approximately 1.8 million square feet or 5.8% of the portfolio gross leasable area set to expire in 2021, with the majority of 2021 expirations falling in the fourth quarter.
The REIT also agreed to expand the parking lot for its Doerr Lane property in San Antonio, Texas and we're in active discussions with tenants for similar parking lot expansions and lease extensions at 3 additional properties. To remind everyone, total cost for the Doerr Lane expansion are estimated to be approximately $4.5 million. Upon completion, which is currently estimated to be December 1 of this year, annual base rent will increase by approximately $459,000 and the building lease term will be extended for a total of 3 years to November 2030. The REIT ended the quarter with occupancy of 98.3% and a weighted average remaining lease term of 4.5 years. Within our private capital development pipeline, the REIT has projects at various stages in the development process, totaling approximately 4.6 million square feet. This includes a two-building project in Bayonne, New Jersey that is now 100% leased and 1 building in the Inland Empire market that is being marketed for lease. In addition, we have 8 projects in preconstruction or construction in the Los Angeles, Phoenix, Chicago, Minneapolis, Houston, Nashville, New York and New Jersey markets.
With our development activity ramping up, we remain focused on capital recycling initiatives to both strengthen our balance sheet and create additional flexibility to allocate capital to our growing development pipeline. Lastly, as part of our continued focus on sustainability and ESG, the REIT will be publishing our first standalone ESG report in the coming months and we look forward to talking more about our ongoing initiatives and reporting on our progress throughout 2021.
With that, I'll now turn things back to Scott to wrap up.
Scott Frederiksen
Thanks, Matt. As I said at the top of the call, there is no shortage of uncertainty in the current market and we plan to continue our proactive approach to portfolio management and our measured approach to capital allocation in the near term. That said, given the proven resilience of our portfolio throughout the global pandemic and the rapidly improving fundamentals in the U.S. industrial market, we remain optimistic about the long-term outlook for our business.
Thanks for your time and attention this morning. Hope you're all staying safe and healthy and we'd now be pleased to answer any questions you may have.
Question-and-Answer Session
Operator
[Operator instructions] And the first question comes from Mike Markidis from Desjardins.
Mike Markidis
Congrats on the strong quarter. Nice to hear that ramp in fee income that you guys expect next year. So, thanks for that guidance. On the Walton sale from the private capital pipeline, was that property sold vacant or did you guys lease it?
Matt Cimino
That was sold vacant. We had completed the building and this is a little like the situation we ran into in California while ago where we also sold a vacant building and anytime, we sell a vacant building, I guess, you can assume that - and rest assured, it was a good outcome for our investors and our partners. We were happy to book a promote and it was overall a good outcome.
Mike Markidis
Now, I think there's some additional disclosure on the JV stuff in those new slides in your deck which I really appreciate. Now, I think there was a number and I can't remember it off the top my head, but it's somewhere in around $80 million would be the expected commitments over the next 12 months on the stuff that's in construction. So, would that be specifically related to Mansfield, Eagan and Nashville?
Judd Gilats
It's actually related to - it's a few of those projects along with the - it does not include the Nashville project. It's really Eagan, Houston and Mansfield and it relates to the amounts that are currently under contract with general contractors or with subs for the work being done. That's just part of a standard disclosure of what the amounts that we have contractually - or contractually obligated to fund at this point.
Mike Markidis
Right. I think you had the obligations plus an anticipated spend over the next 12 months, which was great.
Judd Gilats
Yes. On those - yes, Mike, those are on those specific projects as opposed to the greater pipeline that Matt and Scott talked about.
Mike Markidis
Okay. And that would be at a 100% and on top of the land value. Correct?
Judd Gilats
Yes. And that's irrespective of the amounts that we've - some of that will be funded through debt financing.
Mike Markidis
Yes, of course. Okay. I think on your expiry disclosure, the way you guys do it is it's on a net of commitments basis. So for 2021, do you have an offhand what the gross expiry figure would have been and any - I mean, if you [indiscernible] good disclosure on what your leasing spreads are, but just what the leasing spread is for the stuff that's been secured for 2021 renewals at this point?
Matt Cimino
We haven't disclosed anything. I mean, I think the spread information that we have is out there and we've tried to chop that up in a number of different ways in terms of commenced in the quarter versus signed in the quarter. So, I think we put out the - in both the press release, and our deck, you can see the spreads from the 2021 stuff. I think what remains in 2021, I guess, more generally is really back-end loaded. And I think I alluded to that in my earlier remarks. We're really focused on the bulk of the 2021 activity in renewals occurring in the fourth quarter. So, we're just getting underway on a lot of the more material ones and discussions are trending positively, but it's pretty typical that we would be on a timeline where we'd be talking with those tenants about a year in advance, so we're kind of right on top of the critical point of those discussions.
Scott Frederiksen
But, Mike, if your question was looking back, how many leases did we have on the year started that we needed to renew and how many are left, I think - I want to say it's 3 million or 4 million feet originally and now we're down just to the last few.
Mike Markidis
Yes, no, if you could circulate that around after that would be great just in terms of the commitments that you have on renewals so far. And then, last one for me before I turn it back. I know it's early, you're actually working on the 4Q ones, but when you look at 2022, you had a fairly good chunk of leases coming due. So, how are you guys thinking about that internally just given where the market is? Is it - is the goal to play a game of chicken, so to speak and let the market keep going and rates keep rising or are you thinking that it's a good time to start knocking on doors and negotiating blended extends ahead of time?
Matt Cimino
Yes. Case-by-case, I certainly think we think the market is coming to us. So, I don't think we're going to go out of our way to instigate lease conversations in certain markets or for certain buildings, but it depends. I think it depends on whether the tenant is approaching us or whether there is an opportunity for something that's ancillary to the renewal like a parking lot expansion for example. So, I think we're taking those case-by-case and I think that's probably going to continue to be the approach throughout 2021. I'm sure you'll start to see us chip away at 2022 renewals here in the next quarter or two.
Scott Frederiksen
If history is any indication, Mike, we'll end 2021 with a lot of the 2022s already completed.
Operator
And the next question comes from Matt Kornack with National Bank Finance.
Matt Kornack
Sorry for the accounting nature of my questions, but Judd on straight-line rent versus free rent, how should we think of that this quarter versus sort of a run rate going forward and how will those 2 interact with one another?
Judd Gilats
Sure. So, I'll focus on the free rent piece of it. This quarter we had about $950,000 or so of free rent. There were couple of bigger leases that we had executed previously that had free rent out into the future 1 month in any particular quarter and so we had it so much staggered. And one of those - or a couple of those hit this quarter. As we look out the next - sort of the next year, 1.5 years to the leases that have already been signed, we don't see that number currently being ahead of maybe $300,000 to $400,000 at most each quarter, but as Matt talked about, there are some leases coming up and we don't know what inducements will be that we'll need to provide to tenants if that comes up, but as we've currently got it booked, we expect that free rent piece to be in that, like I said, $300,000 to $400,000 at most each quarter.
Matt Kornack
And then, with regards to the asset that was sold and vacant, can you provide what the costs would have been that you were carrying just to get a sense as to the impact on NOI from selling that?
Judd Gilats
Yes. We were carrying it just under what we sold it for. There was a small gain associated with it when we sold it. In terms of the impacts on NOI - can I - I'll have to get back to you on that, but it was - it was obviously it was vacant. And so we are carrying the cost to operate and it was - before without - going off the top, I'll just have to get back as to what that number is, it's not on a huge number, but it was impactful in terms of the difference in NOI from Q2 to Q3.
Matt Kornack
Okay. And I mean, yes, just comments here it was pretty good quarter sequentially in terms of NOI and I don't think we were forecasting.
Scott Frederiksen
Thanks, Matt.
Operator
Thank you. And the next question comes from Himanshu Gupta with Scotiabank.
Himanshu Gupta
So just on the occupancy on the U.S. private portfolio which you acquired this year, I remember you acquired at 95% occupancy. What is the occupancy right now on that portfolio?
Scott Frederiksen
So just to - I guess, review that portfolio, when we put that portfolio under contract, there was about 1 million square feet of vacancy that we knew we were going to need to deal with. And while we were in due diligence, so during Q1, we actually were able to lease 500,000 feet of that. So, we knocked off about half of it while we were in due diligence. Now obviously, that free rent impacted us going forward after we closed, but we did chop a lot of the would before we even closed on the portfolio. Then what you saw recently, Himanshu, was that you saw us lease a 200,000 square foot space in Dallas, which we had been talking about is one of the pieces that we needed to solve. And so, that one's solved now. So really, we're down to 2 things.
We're down to 300,000 feet out of 9 million square feet originally that still remains in Atlanta and it's the other part of the 500,000 square feet vacancy that we leased. It's an 800,000 square feet building. We leased 500,000 feet of it. There's still 300,000 feet remaining. It's state-of-the-art, good space and we're confident we're going to lease it, but we haven't yet, so that's the last piece of the vacant space we need to deal with. And then of course, just as a reminder, we had that, I'll call it, extra bonus, which was the 85-acre parcel in Dallas, where we can develop over 1 million square feet and we've said before and we're working hard on trying to find a lead tenant or build-to-suit prospect for that, but we didn't put a lot of value on that when we bought the portfolio and for us that would be great view to the underwriting.
Himanshu Gupta
So Dallas is done, and Atlanta still needs to be taken care off. Okay. And so on Dallas lease, what was the lease term on the lease area and what was the rent you underwrote on that property?
Scott Frederiksen
Do you have, Judd, at your fingertips where we ended up versus what we underwrote?
Judd Gilats
Yes, it would be - the leasing - the lease rate wound up significantly higher than what we underwrote it. It was - we had - the tenant that came to us was - didn't have a lot of options. And so, we were able to opportunistically price up that lease. It's a 3-year lease, that is - I want to say we're 10% to 15% at least above where we had underwritten it and maybe even higher.
Himanshu Gupta
Okay. And then, I guess, the acquisition of that private portfolio, if I remember it was in place cap rate was 5.5%. So do you think you by the end of the year or by the first quarter, the yield will be much higher, I mean, something around 5.75% to 5.9% there?
Scott Frederiksen
Yes. I think what we said publicly when we bought that portfolio, Himanshu, it was 5.5% stabilizing to a 5.9%. And so, the last piece we need to get to, of course, is that 300,000 square foot vacancy in Atlanta. But I'd say this is. As Matt alluded to in his prepared remarks, the thing that we didn't underwrite when we quoted those cap rates, of course, was all these parking lot expansions and it's a pretty good return on cost as you saw. We're spending $4.5 million, but we're collecting almost a 10% return on that money. So, to the extent we can order into that portfolio and do 3 or 4 of those, that was gravy to the original underwriting. So, there's - a lot of things are turning out better than we thought when we put that portfolio under contract. So far so good, knock on wood.
Himanshu Gupta
Absolutely. I think clearly, you've done a value add since you acquired that portfolio. And then, staying on the lease theme, on the leasing activity and looking at the re-leasing spreads are 15% to 20%. I mean these are large increases and is that a function of expiring rents being very low or do you think market rents have moved up generally for some of your assets?
Scott Frederiksen
I mean most of the figures I'm seeing are showing market rents in the last 12 months have moved 6%. And as you know, our portfolio rents grow on average 2% a year. So, just in the last 12 months, regardless of where we started the year, we've picked up 4% [indiscernible] on that growth and rents and from everything we're seeing, we expect the market to continue to perform going forward in the short and medium term. So, we're feeling good about where rents are trending and our re-leasing spreads on a cash basis have generally been somewhere between that 5% and 15% and recently, they've been trending - a lot are closer to the 15% than the 5%.
Himanshu Gupta
And in that context, what are you feeling about the lease expires in 2021? I mean, any major lease coming up for renewal next year?
Matt Cimino
Yes, Himanshu, there's a couple of larger ones that are in Q4. That's kind of what I was alluding to. There's otherwise nothing really of size there. We've got a 750,000 square feet lease in Columbus that expires really in the last day of the year and another lease that's about 200,000 square feet in Central Florida. Those are the biggest ones and they're both tucked into December. So otherwise, it's a combination of some smaller spaces scattered throughout the year.
Himanshu Gupta
Okay. And then, just switching gears on the fair value gains in the quarter. What led to that change and does the fair value been split into only certain markets or certain assets?
Judd Gilats
We really saw across the market - across the whole U.S. market a continued compression of cap rates and increases in leasing rates. Earlier this year, we had been a little more conservative in the way we had evaluated those changes wanting to make sure that they actually took hold before we pushed some of those changes through our cash flow models, which are how we drive our fair values. And so, there was probably a little bit of catch up from what we had seen earlier in the year and primarily it was driven by, like I said, just where we're seeing market movements in both cap rates and rental rates. A little bit was due to individual execution at certain properties, but most of it was market movement.
Operator
And that does conclude the question-and-answer session. I would like to turn the conference back over to Scott Frederiksen for any closing comments.
Scott Frederiksen
Okay. Well, thanks again for your time and your interest in WPT Industrial REIT. I realize today was a busy morning for a lot of you. So to the extent you're listening to the replay and you have questions, pick up the phone and give us a call, we'll be happy to answer your questions any time. Thanks again.
Operator
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
