Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Core FFO per share increased by 8.9% compared to last year, reaching $0.61 for the quarter.
- Acquisition volume for the second quarter totaled $225.6 million, consisting of 10 buildings with favorable cap rates.
- Same-store cash NOI growth was 6.1% for the quarter and 6.5% year-to-date.
- Retention rate was strong at 79.9% for the quarter.
- The company has a low leverage with net debt to annualized run rate adjusted EBITDA between 4x to 5x.
Negative Points
- Demand remains subdued in many markets, although it is improving.
- Deal volume in Q2 remained consistent with Q1 but is still well below the levels seen over the past few years.
- The company sold seven buildings for aggregate proceeds of $78.2 million, with some sales being modestly dilutive to core FFO.
- The acquisition of a vacant building in El Paso will have a drag on earnings this year due to expected downtime.
- Credit loss guidance remains at 50 basis points for the year, with $1 million of credit loss already incurred year-to-date.
Q & A Highlights
Q: Just on the guidance front, Matts, you guys had a beat here in the quarter. Could you just kind of run through maybe what, in more detail, what some of the puts and takes are that kept guidance the same despite what seemed like better performance in the quarter?
A: Starting with the internal growth, we have increased our same-store guidance by 25 basis points at the midpoint. The primary reasons for not increasing the corporate flow guidance are related to acquisition and disposition activity. We are slightly ahead on the volume side, but the in-place cash cap rate on what we've acquired to date is 5.4%, and that's due to the $32 million vacant acquisition we made in El Paso this quarter. We do not have that building contributing to earnings in our budgets for this year. Additionally, the cash cap rate on our dispositions is approximately 8%, which is modestly dilutive to core for this year but improves the long-term growth profile of the portfolio.
Q: Can you run through what drove the higher other income in the quarter, and also, did the sales -- was the same-store increase all fundamentally driven, or was any of that a benefit of getting some of these non-core assets off the books?
A: The primary driver for the increase to same-store was outperforming initial guidance related to cash leasing spreads and occupancy. We have done 95% of our leasing at approximately 29%. There were two one-time items contributing to other income: a settlement with a third-party consultant and a settlement with a former tenant related to building work that was not completed. These settlements were included in guidance.
Q: Bill, I wanted to touch on the health of the investment markets. Are sellers of quality product holding back on putting assets in the market yet? What is the catalyst we are waiting for to drive more activity within the space?
A: The first quarter saw aligned seller and buyer expectations, leading to a healthy transaction market. However, a spike in interest rates in April caused a pause in Q2. Now, in the back half of Q2 and into Q3, we are seeing a fair amount of product come online, with narrowing bid-ask spreads. If interest rates pan out as expected, we anticipate the transaction market will pick up, leading to more acquisitions for us.
Q: How should we think about the pricing of these assets? Should we expect stabilized cap rates in the high 6s or will it trend back down to the mid-6s to low-6s?
A: Our guidance increased our cash cap rate for the year, but a fair amount of that has been baked into the first half. We constantly reset our cost of capital as we evaluate transactions. With current debt rates and our cost of capital, you could see cap rates in the lower six range for the remainder of the year, depending on where cost of capital is as we move throughout the year.
Q: It seems as time passes that you will be doing more acquisitions of properties where leases were signed in the peak period of '22 and '23. How are you thinking about the possibility of recording negative cash spreads on renewals five or six years down the road?
A: Market rent growth is factored into all of our acquisitions. We forecast future market rent growth and make adjustments with our regional managers and market teams. We have been conservative with our market rent growth expectations, which has treated us well in the past. We believe there are positive tailwinds in the industrial sector, such as nearshoring and onshoring dynamics, which are not fully baked into market rent growth forecasts.
Q: Can you provide the economics of the new development starts in the quarter? Specifically, what is the expected yield and how does that compare to your view of stabilized cap rates once leased?
A: For the Nashville transaction, we are projecting a mid-7s stabilized yield, which is about 100 basis points higher than market due to a lower land basis. For the Portland, Oregon project, we expect a mid to high 6s yield, around 6.5% to 6.75%, as it is a build-to-suit transaction.
Q: How do you view your cost of capital today? Are you considering any equity issuances to fund external growth?
A: If we were to raise long-term debt, it would likely be in the high 5% to 6% area. We have no incremental equity issuance included in our guidance, but we do have $72 million of proceeds available. We are retaining approximately $100 million of cash after dividends paid and have increased our disposition guidance, which can be used for corporate purposes.
Q: Appreciate the color on maintaining the credit loss assumption of minus 50 bps for the year. Can you provide an update on what has been captured year-to-date and any known tenant issues for the back half of the year?
A: We have experienced approximately $1 million of credit loss year-to-date, equating to 17 basis points. Our guidance is 50 basis points for the year, implying more credit loss in the second half. This level of credit loss is in line with our historical average, and we are not seeing anything thematic across our portfolio.
Q: With essentially all the '24 lease expirations already addressed, can you provide some color on the '25 lease expirations and any potential known moveouts?
A: We do not have any large known moveouts for 2025 at this point. We will provide more visibility as we move through this year.
Q: Can you provide any high-level color on how you think 2025 rent spread trends could pencil out compared to what you're guiding toward in 2024?
A: We will wait to move through this year and get more visibility into next year before providing specific guidance on 2025 rent spread trends.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
