INDUS Realty Trust, Inc. (INDT) CEO Michael Gamzon on Q1 2022 Results – Earnings Call Transcript

INDUS Realty Trust, Inc. (NASDAQ:INDT) Q1 2022 Results Conference Call May 10, 2022 11:00 AM ET

Company Participants

Michael Gamzon – Chief Executive Officer

Jon Clark – Chief Financial Officer

Conference Call Participants

Dave Rodgers – Baird

Connor Siversky – Berenberg

John Nickodemus – BTIG

Emmanuel Korchman – Citi

Mitch Germain – JMP Securities

Brian Hollenden – Aegis Capital

Operator

Good morning, and welcome to INDUS Realty Trust’s 2022 First Quarter Earnings Conference Call. This call will be followed by a question-and-answer session. [Operator Instructions] In addition to regularly available earnings materials, INDUS has also published a supplemental presentation, which is available on its website at www.indusrt.com under the Investors tab.

This conference call will contain forward-looking statements under federal securities laws, including statements regarding future financial results. These statements are based on current expectations, estimates and projections as well as management’s beliefs and assumptions. Forward-looking statements are not guarantees of performance and the actual operating results may be affected by a variety of factors.

For a list of those factors, please refer to the risks listed in the Company’s most recent 10-K filing as updated by its quarterly report on Form 10-Q and subsequent quarters. Additionally, the first quarter results, press release, and supplemental presentation contain additional financial measures such as NOI, FFO, core FFO, and EBITDA, that are non-GAAP financial measures.

The Company has provided reconciliation to those measures in accordance with Regulation G and Item 10e of regulation S-K. The Company’s speakers this morning are Michael Gamzon, INDUS’ CEO, who will cover recent activity, market conditions, and updates in our pipeline. We will be followed by Jon Clark, the Company’s CFO, who will cover the first quarter results in detail. After the prepared remarks, the line will be opened up for your questions.

With that, I’ll turn the call over to Michael.

Michael Gamzon

Good morning, everyone, and thank you for your continued interest in INDUS, 2022 is off to a great start for our company. We continue to achieve strong results with our current portfolio 100% leased, and our acquisition and development pipelines adding new projects that will deliver strong returns on investment and grow our cash flow. At the same time, we recognize the uncertainty that the current geopolitical climate, high rates of inflation, rising interest rates, and continuing supply chain disruptions create to the United States economy in the capital markets.

Despite these potential challenges, the logistics sector continues to perform extremely well with widespread demand across our markets from a diverse group of tenants. The ongoing difficulties with the supply and availability of goods, increased fuel and labor costs, and the continued drive to reduce delivery times, create broad-based long-term tailwinds in demand for logistics space. This need is driven not just by pure play e-commerce companies, but by a diverse range of industries seeking to improve their supply chain efficiencies. Industries, including industrial manufacturers and distributors, omnichannel retailers, consumer packaged goods companies, health care and pharmaceutical companies, amongst others.

Our recent lease signings included an expansion in Charleston by Cummins, a major industrial manufacturer, Walgreens, which leased space in the Lehigh Valley for pharmaceutical distribution, and a major home improvement retailer taking space in Charlotte for same-day delivery of building materials to job sites. These tenants have just mentioned; all are investment grade. This strong demand is coupled with low vacancies and limited supply in the market.

Tenants simply have very few options for space in any of our geographic markets. As an example, subsequent to quarter end, we addressed our largest 2022 lease expiration with a renewal in the Lehigh Valley. This lease was with a $30 billion market cap investment-grade global 3PL, servicing a very large investment-grade multinational client in that space. This tenant was paying somewhat above our Lehigh Valley average rent as a result of a shorter-term renewal they did a couple of years ago.

With essentially no alternative space within the market, the renewal terms had no concessions at an initial rate nearly 40% above the in-place rent. We do not see the warehouse supply situation changing meaningfully for the next several quarters. 2021 year-end deliveries were significantly below the beginning of that year’s forecast, and we expect the same to happen in 2022. In the first quarter, approximately 86 million square feet delivered according to CBRE, which annualized is well below the 2022 forecast and also is below current demand. Challenges on the delivery front include delays in receiving permits and final entitlements as well as in the availability of key construction inputs.

In response to these challenges and to take advantage of this expected supply and demand imbalance, over the past couple of quarters, we’ve targeted acquisitions that had short-term leases in place or partially leased as well as added to our pipeline of forward purchases. We also proactively ordered materials and built in more improvements into our developments to make them move in ready upon delivery.

More broadly and think about in this in the current environment, I feel really good about where we sit today. Including the acquisitions scheduled in our pipeline, we’ve expanded from four markets at the start of 2021 to seven by early next year. These markets have multiple drivers of demand across a broad base of industries. The Lehigh Valley and Hartford logistics market service very large population corridors with significant economic output and spending power. These markets are advantageous locations for regional distribution with very high barriers to entry.

Our Southeast markets continue to benefit from tremendous population and economic growth. In our experience, population growth leads to housing starts, new business formation, and the increased need for medical, commercial, retail, and hospitality offerings. This, in turn, drives increasing demand for logistics space, last mile local and regional distribution. Additionally, the Southeast benefits from the growth in manufacturing. I mentioned Cummins earlier, which has a large presence in Charleston, and I’ll note in the Carolinas, there have been a series of major facilities opened or announced, including for the production of EV vehicles, batteries, beverages, pharmaceuticals and furniture, amongst others.

While we don’t own these large-scale manufacturing plants, our tenants apply those nearby facilities. Lastly, in the Southeastern markets, land for industrial anywhere near the population center is increasingly scarce as these fast-growing metros continue to sprawl. As a result, industrial competes for sites with residential, commercial, retail, and other uses. And when people want to live and work, they don’t really want industrial. So we are really pleased with our current holdings, which are difficult to replicate locations.

Next, I’ll touch on our internal growth. Our current in-place annual escalations averaged approximately 3%. Our recent leases have averaged above that with 3.5% to 4% becoming more typical across our markets. We also have a significant mark-to-market rent in our existing portfolio, which we conservatively estimate at approximately 23% on a cash basis. We expect this mark-to-market to continue to increase due to upward pressure on rents and the quality of our portfolio. We think this is a particularly strong number given that our portfolio has grown quickly over the last couple of years, giving us a larger percentage of leases with recent commencements.

While we do not have significant tenant rollover in the near term, our development and forward purchase pipeline will continue to benefit from the rising rate environment. Speaking of our pipelines and external growth, we have 1.9 million square feet and approximately $225 million in investment in our current acquisition and development pipelines. We estimate the initial stabilized yields on this pipeline to be in the mid 5% range, which is meaningfully above current market cap rates. And this assumes 95% occupancy on specs based, which effectively lowers the yields by about 25 basis points.

More importantly, we expect these investments to deliver strong returns on investment over time as we believe rents and yields will increase given these properties quality and locations. For both our acquisition and development pipelines, we take a conservative view on rents. That said we do expect meaningful rent growth due to scarcity of supply, continued increase in replacement cost due to inflation, and growth in land prices. Completion of this pipeline will occur throughout 2022 and into 2023, with deeds noted in our supplement. We typically assume 12 months of lease up upon a project’s completion or closing of a value-add acquisition, with no leases in place upon the delivery of our spec developments.

We are excited to add a new project to our development pipeline this quarter, a 91,000 square foot warehouse in the Lehigh Valley. The Lehigh Valley continues to perform extremely well, and this site is in a core infill established business park with excellent highway access. The site is most of its entitlements in place, and we hope to close on this land later this year upon receipt of the final approvals. In terms of our existing pipeline, we expect to receive the CFO for our two-thirds leased, 103,000 square foot project in the Lehigh Valley in a few weeks.

Our two-building Orlando project, Landstar Logistics is on track to deliver later in the third quarter, and we are seeing excellent pre-leasing interest. We also expect to deliver our Hartford, Connecticut project that is two-thirds preleased towards the end of the third quarter. We have users expressing interest for the balance of that space now that we have commenced putting up the walls. Lastly, we’ve commenced the construction of our next project in the Lehigh Valley, a 206,000 square foot warehouse we expect we’ll deliver in 2023.

Turning to acquisitions, we’re very pleased with the pipeline of building purchases we have under agreement. We believe all of these projects are amongst the best located in their respective markets, and those with near-term deliveries are attracting good tenant interest. These forward purchases provide a strong complement to our own development activities and leverage our existing capabilities and market knowledge.

And importantly, our efforts to secure these properties are paying off in the current environment. With this pipeline, we do not have any risk with respect to construction contemplation as we have a fixed purchase price, but we will continue to benefit from market rent growth. As an example, using current market rent, we expect the yield on the Charlotte acquisition in our forward pipeline to be more than 100 basis points above our initial underwriting, and there are still several quarters of potential rent growth until this property delivers.

We are announcing today that we are in contract to purchase a fully leased 205,000 square foot last mile portfolio in the Orlando and Palm Beach markets. These properties are in irreplaceable locations with essentially no new development nearby, and we are particularly excited to have our first properties in the South Florida market. We believe the current in-place rents are more than 15% below the current market, and we expect to capture that rent spread as tenants roll over time. Our team continues to do an excellent job of evaluating and sourcing opportunities, many of which are off-market and lightly marketed, and we remain active in evaluating and diligencing land sites and properties to add to our pipeline.

We recognize the current uncertainty due to the economic and geopolitical news; we have used similar periods in the past to create value for our company. For example, in the spring of 2020, we put under contract the land for Landstar Logistics after another group dropped it due to the onset of the COVID-19 pandemic. With our targeted strategy, we are prepared to seize upon select opportunities that may arise from any current uncertainty.

As part of our preparation, we have the capital structure in place to support this growth. In addition to the $126 million of cash on our balance sheet, we put in place a $150 million delayed draw term loan as part of an expansion of our credit facility. Many of our planned mortgage repayments with the term loan and cash, we have all the capital in place to fund our current acquisition and development pipelines with some dry powder. And for any future opportunities beyond that amount, we have substantial additional borrowing capacity under our revolving line of credit in addition to any other capital we may source.

Lastly, but most importantly, I want to thank the INDUS team for their continued hard work and exceptional performance. It is through their efforts that we achieved our results and are in a strong position for future success.

With that, I’ll turn it over to Jon for the financial review.

Jon Clark

Thanks, Michael. Just starting with some of the headline figures, core FFO for the first quarter was $4 million. That’s a 66% increase over the comparable quarter of the prior year. Core FFO benefited the most from growth in NOI. NOI was $8.7 million for the first quarter. That’s up nearly 30% from the prior year’s first quarter. Growth was driven principally by the impact of acquisitions during 2021, including the addition of the Charlotte build-to-suit that we placed in service of October of last year as well as increase in occupancy in the value-add acquisitions and previously delivered spec developments.

As Michael noted, as of March 31, our occupancy is 100%, both in total and for our stabilized in-service portfolio. AFFO for 2022 first quarter was $3.4 million compared to $1.9 million for the first quarter of 2021. With our limited recent tenant rollovers, our second-generation leasing costs were relatively low this quarter. We also had a low level of maintenance CapEx expenditures. We expect about $1.3 million in maintenance CapEx spread over the next three quarters. That includes about $600,000 for a roof replacement with about 80% of that cost expected to be incurred in the second quarter.

In March, we announced that we had commenced a process to fully exit our remaining office flex portfolio. These assets were reported as held for sale and operating results are recorded as discontinued operations for all the periods that we present. As a result, our core FFO, AFFO, NOI, and other financial measures exclude these assets. The office flex portfolio was unencumbered. And once sold, the proceeds will be used for the acquisition and development pipeline that Michael spoke about. We’ve received good interest from prospective buyers in a rather short period of time in marketing the portfolio. And we anticipate we’ll be under contract before 2Q is done and we’ll complete a sale sometime in the second half of this year at a price that’s above the GAAP net book value.

Cash same-property NOI for 2022 first quarter was up 8.9% versus the comparable 2021 period. Cash same property NOI benefit the most from the burn off of free rent on first-generation space. For the last several quarters, our same property pool is 100% leased, and we expect to have very few new leases in the same property pool during 2022. This will make for tougher comparisons over the course of this year. At the same time, the same property pool represented about 75% of our total cash NOI for the 2022 first quarter. And as our acquisition and development activity ramps up, a larger and larger percentage of our total portfolio is not going to be covered by the same-store metric. Wrapping up, just a few things on the income statement, interest expense decreased about $230,000. That principally reflects an increase in capitalized interest, which just corresponds to the increase in the development activity.

G&A expenses were $2.9 million for the 2022 first quarter, which is essentially flat from the corresponding prior year quarter. Excluding the noncash mark-to-market chart related to the non-qualified deferred compensation plan, G&A expenses would have been $3.2 million. The 2022 first quarter numbers included a reversal of an accrual for capital-based state taxes that we no longer will pay because of our REIT election. That was about $170,000. And that’s been mostly offset by about $175,000 in expenses related to the continued build-out of our financial systems and accounting platform. Overall, we’re expecting to incur about $350,000 in costs related to the accounting system project this year.

I’ll next turn to the balance sheet. Our liquidity at the end of the first quarter was $226.4 million. That reflects $126.4 million in cash plus the undrawn capacity on the credit facility. As Michael mentioned, subsequent to quarter end, we amended our credit agreement and added a $150 million delayed draw term loan to the existing $100 million revolving credit facility. Based on our current leverage, the term loan has a floating rate equal to 115 basis points over SOFR. We elected to swap to fix this to an effective rate of 4.15%.

Currently, there is no amounts drawn on the term loan, but we expect to repay about $62 million in mortgages at the end of May with the first draw that we will do on the term loan. The remainder of the term loan remains available to fund acquisitions and developments as well as repay other mortgage debt. This credit facility now has an accordion feature that enables us to increase the borrowing to up to $500 million. We’re very pleased with this transaction as it significantly increases our financial flexibility while maintaining a conservative debt to enterprise value ratio.

And with the mortgage paydowns, we will unencumber a number of assets, which will increase our borrowing base. With the repayment of the $62 million of mortgage debt from the first draw on the term loan, other than an outstanding $26 million construction loan on the Charlotte build-to-suit will have no debt maturities for five years. I’d also just like to make a quick note on the balance sheet regarding the strength of our tenancy credit. Our collection experience is and has been excellent. Accounts receivable is less than $1.6 million and is comprised of current balances due from tenants.

In this quarter’s release, we provided some additional earnings guidance information for the second quarter and full year. Please note that these assumptions only include what is identified in our acquisitions and development pipeline schedules that were in our press release and do not include the Florida portfolio acquisition that we announced today as we’re still completing our diligence. For the 2022 second quarter, we estimate G&A excluding the mark-to-market charge for the nonqualified deferred comp plan will be slightly higher than Q1 2022, with a slight increase in noncash stock-based compensation versus the first quarter.

Last year, we began issuing stock compensation with a three-year vesting period and the impact of annual grants start in the second quarter of each year. We estimate interest expense will be comparable to Q1 2022, and we do not expect a significant change in our current debt outstanding. And we plan to make the initial $60 million drawdown on our new term loan in Q2 with the proceeds going to extinguish near-term mortgage debt maturities. And the average borrowing cost of the debt that we’re going to extinguish is essentially the same as the effective rate on the term loan. Interest expenses net have capitalized interest. In the first quarter, we capitalized about $350,000 of interest. And it’s fair to say with the development activity, we’ll continue to capitalize about the same amount of interest next quarter.

For the full year, we estimate full year NOI from continuing operations at $35 million to $38 million. This narrows the range of guidance provided at year-end of $34 million to $38 million. NOI from continuing operations excludes the office flex portfolio, which we had put up for sale. And historically, that portfolio had generated about $1.1 million in NOI annually.

We estimate G&A excluding the mark-to-market charge for the nonqualified deferred comp plan to range between $13 million and $13.6 million, which are consistent with the G&A guidance we provided in Q4 earnings and included in that figure is approximately $1.8 million of noncash stock compensation.

Also for the full year, we estimate interest expense of approximately $6 million to $6.6 million. This assumes the first drawdown on the term loan in 2Q of 2022 of $60 million, a second draw on the term loan during the fourth quarter of $30 million, which will fund acquisition pipeline and development spend. The remaining drawdown on the term loan will likely occur in 2023, not in 2022. Based on our development activity, quarterly, we expect we’ll capitalize interest at a quarterly rate that is similar to Q1 2022.

With that, I’ll just turn it back over to Michael.

Michael Gamzon

Thank you, Jon. As I said earlier, 2022 is off to a great start, and we remain optimistic that we are well positioned to capitalize on the current environment while remaining focused on our strategy for growing cash flow, net asset value and most importantly, shareholder value. That concludes our prepared remarks, and I’ll turn it back over to Chad, our operator, to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question will come from Dave Rodgers with Baird.

David Rodgers

Michael, I wanted to just talk about some of the growth opportunities and avenues that you have in front of you. You talked about both the acquisition pipeline as well as development. But I guess as you see that unfolding over the next couple of quarters, do you have a sense for where each one of those goes? And do you have the capacity on the development side to take on more and more so maybe a lot in there, but I want to try to gauge the difference in the acquisition and development pipelines as you see that you’re progressing.

Michael Gamzon

Yes. Thanks, Dave. Good to catch up with you again. We think there are opportunities in both. What I’d say is near term we’re still actively looking for land. As you know, we’ve done a lot of development in our history; we kind of think that’s kind of our core mindset, even when we think about buying buildings. And so we’re continuing to look for really good development sites in the markets that we’re targeting. There’s always things we’re looking at starting to do due diligence on. And we think there’s a lot of exciting opportunities potentially down the road there. But all that’s going to take time.

Entitlements these days are taking depending on the market 9 months to 18 months. So in terms of having an impact on our square footage, those are going to be a little bit further out. But we are actively looking and we do have the capacity to take on those projects because again, they all kind of stagger a little bit between due diligence entitlement process and then actually developing them. And we’ve developed a bolstered, our internal team on the construction development side by a couple of people over the last couple of years, and we just hired someone about a month ago as well. So we feel really good there, but we also see there are really good acquisition opportunities.

We mentioned the one in Florida that we’re very excited about, that we announced today, which are last mile assets, really irreplaceable locations. We think there’s a good mark-to-market ramp. We’ll realize over time as leases roll and are thrilled to have that. And we think there’ll be increasingly some additional opportunities as we move forward through the year. I think being a well-capitalized company that controls its own capital without external committees and other things, I think, puts us in a good position and little bit more of an uncertain capital market environment.

David Rodgers

Great. That’s really helpful. And then maybe on the pipeline of some of the forward deals that you’ve done, there’s been a little bit of a pushback in some of those transactions in terms of stabilization or closing. Is that just a function of construction? And have you guys thought about bringing some of those in-house to control that process a little bit better?

Michael Gamzon

Yes. So I think on the latter question, it’s really a deal with kind of these other developers. So I don’t think it’s really an opportunity to bring in-house. And as you alluded to, I think the timing is really driven by a series of things that I think everyone is sort of experiencing in really the construction space and particularly in the industrial space, which has just been delayed. And what I comment on is a number of these forward transactions are with probably a couple of the largest industrial merchant builders in the country and their GCs are some of the largest general contractors in the country for industrial. And they’re facing some of the same delays in materials.

But in all honestly, some of the delays for a couple of the projects are more on the front end. As an example, in Charleston, the developer has taken them after they’ve had all their approvals and submitted for building permit, it’s taken seven months to get a building permit to do the vertical construction. So the site work has been done and completed, and they’ve recently received the building permit. But just an example of that it’s many different factors that are causing these delays and it’s kind of widespread across the industry. We’re managing it where we can. As I mentioned that once we’re undergoing construction, we’re certainly putting in a lot of the spec improvements into the building, so they’re ready.

We’ve preordered equipment that for example, can’t be used on a certain development. We can relocate it to another development. For example, dock levelers used kind of in the loading docks. Those now have a fairly significant lead time, but they are somewhat movable. So we’ve ordered those in advance, we have them ready for move-in space. So there have been a little bit of delays. We think they’re all manageable. We think some of the construction timing time lines may start to come in a little bit. We’re hearing some materials have better availability, but there are other things that get pushed out as well.

David Rodgers

I guess the good news is rents go up that whole time, hopefully. So last question for me on the rent front, your 23% cash mark-to-market, I think is what you said in your prepared comments, please correct me if I’m wrong on that. But that’s a nice improvement from where you’ve been. So I guess, can you talk about is that kind of a consistent trend that we should see across the portfolio in the coming quarters and next year as you think about some of these roles or any particular outliers that we should be looking for?

Michael Gamzon

Yes. So I did say 23%. And I think it’s just a factor of the market. We try to be reasonably conservative in sort of forecasting rents. The market is really dynamic and really accelerating over the last three to six to nine months in terms of rent growth. So we try to make sure we’re seeing deals officially being done at the levels that we’re using that we think are comparable deals as opposed to relying on kind of what indicative rents might be or as an rents might be. So we try to really focus on that. And I think we’re just getting more and more data points of where deals are being done at, and therefore, we’re adjusting our mark-to-market accordingly. I mean some of it is based on our own deals we’re doing. But obviously, we don’t have that many leases rolling in any particular quarter or a year. So we are relying on proven deals. It’s pretty much across our portfolio. We’re seeing rents continue to grow.

All the markets are short space, all have low vacancy, we think that growth is going to sustain for the next couple of quarters, as I alluded to, I think there’s a big pipeline of deliveries, but I think timing of those based on the comment you just made about even our own forward pipeline, those continue to get pushed out for certain projects. So we think the rent growth environment marine is really robust. We expect to see continued improvement in our mark-to-market, and we think that’s kind of driven across markets. And as I mentioned on our forwards, as I kind of said in my prepared remarks, we think those were in a great position because we don’t really experience any of the cost inflation. And as rents continue to grow, it just continues to increase our initial underwritten yields on those projects.

Operator

The next question will be from Connor Siversky from Berenberg.

Connor Siversky

You guys already answered a lot of my questions. But just thinking about the shift in development margins, the expectations from Q4 to Q1. And in the footnote, you guys state that you’re assuming Class A cap rate ranges for the current markets and then the costs are fixed in the contract. So I’m wondering if this slight shift in margins is due to a change in those cap rate expectations or is it driven by timing or just rolling in the new projects into the pipeline.

Michael Gamzon

Yes, I think it’s really just the mix of projects that are in the pipeline and costs have shifted a little bit amongst those. So I don’t think the movement in the margin was too high, I think it was a couple of percent. So I think it really was just a mix. We did add one new project. We’re probably being conservative because it’s new and it a little bit further out into the development pipeline as well. But again, I think the movement overall is fairly small. So I think it’s more just a slight mix in reallocating some costs than any real change in cap rate outlook or yield outlook on the projects.

Connor Siversky

Okay. And then just thinking in terms of some of the commentary from earnings that had some pressure on the industrial REITs in general, I mean in terms of leasing expectations going forward, do you expect a shift in the tenant base at all? Or are different types of tenants, different business segments pulling back where others may be seeing the same kind of demand for industrial space?

Michael Gamzon

Yes. I mean I think obviously, there’s an announcement by one of the biggest takers of industrial space over the last couple of years, a couple of weeks ago that seem to have an impact on the sector. I think in one thing I’d say, and I think all our peers obviously had their earnings a couple of weeks ago, but I think we all had seen Amazon slowing and frankly pulled way back earlier in kind of the quarter earlier; so the first quarter, everyone has sort of seen Amazon pull back, and demand was really, really strong from a whole variety of tenants. So I think it’s logical if Amazon is pulling back by e-commerce broadly, just because they’re a big piece of it, may be shrinking.

I think other peers commented on that as well. Just not shrinking overall, but shrinking as a percent of the demand. But I think what we’re seeing is a couple of different things. One, continued omnichannel retailers bolster their e-commerce efforts. I described kind of what you call it, sort of the home improvement chains, Lowe’s and Home Depot, doing a lot of kind of last-mile delivery facilities. Best Buy, again, we’ve seen in the market, doing a lot of that, and some of the other retailers. For example, Macy’s announced a 1.4 million square foot build-to-suit in the Charlotte market for e-commerce.

So we think there’s all the other players catching up to what Amazon has kind of built and done over the last couple of years, continues to be a really strong driver. But what we’ve seen, if you look at our tenant roster, even our top 10 tenants that’s in our supplement, we always had a very, very diverse group of tenancy. So whether its industrial type supply tires, 3PLs that support consumer product companies and health care companies, those all still are really active. And what we’ve seen a lot of them focus on is really shortening their delivery times, and that’s been a focus for a couple of years, kind of that day of waiting three or four days for a part for your automotive supplier, that just doesn’t cut it anymore.

They want to have two day delivery across the country in a week. We have a tenant in Charlotte. That’s one of the biggest distributors of Brigg & Stratton engines and they expanded their number of facilities exactly for that reason. They needed to have two-day delivery. And I think with the continued inflation trends we’re seeing in the market with wages, availability of drivers, fuel costs, one way for all these companies to reduce their supply chain cost is to have more widely distributed warehouse facilities. That’s a big saving. So we continue to see a drive for shorter times and saving money. And so we’re seeing continued widespread demand across a lot of sectors. So we think even with the slowdown that Amazon said they’re going to have in their absorption, they’re taking a space in the next while. All the other sectors have been picking up and focused a lot on supply chain efficiencies, which we think is very bullish for the sector.

Operator

And the next question is from John Nickodemus from BTIG.

John Nickodemus

Just wanted to ask about some more color surrounding the last mile industrial assets in Orlando and Palm Beach. Just curious what exactly last mile looks like in those two markets and then have the tenant base and rent growth potential for last mile compares to the remainder of assets in those two markets?

Michael Gamzon

Yes. So I think as a general comment on our portfolio, we do have different assets that we say our last mile infill regional. And sometimes it’s the asset sort of the same. It’s just a question of what the tenant inside is doing. So in reality, they’re not dramatically different than some of our other assets. For example, the two buildings in Orlando are very similar to a couple of other buildings we own in Orlando, one that is fully leased to Iron Mountain, which is fairly local paper storage, shredding everything else, and that’s already a 100,000-foot tenant in our portfolio.

The two Orlando assets are in a sort of similar type of part fully built out, very close into Orlando. The tenants in that are sort of, what I would call your classic kind of not e-commerce, but last mile tenants. One is a building product supplier that, again, has delivering construction goods to nearby construction sites. The other is Safelite auto glass is a tenant in that portfolio. Again, local auto glass as an example. Down in Palm Beach, again, there are buildings that are just located really where there’s very little industrial.

The current use is actually for an auto parts importer. It’s kind of a specialized auto parts company. The Company grew up in the area. This is their site. But next door and adjacent are sort of more what you would consider a typical last mile type delivery of food products, electrical contractors, and things like that. So again, I don’t think they’re wildly different than some of the other assets in our portfolio. That’s the location and that’s the use, if that answers your question.

John Nickodemus

It definitely does, Michael. Really appreciate that. And then last for me, with the renewal that came in April and just to address the bulk of your expirations for this year. Saw 2023 looking pretty light as well. I think there were just six leases expiring. Just curious if you had any sort of an early read on known move-outs or renewals for next year.

Michael Gamzon

Yes. Not a ton of early read. Again, the 2023 ones are still pretty far out. What I’d say in 2022, I think there’s about three left. I think we’re in discussions for one of them. One is the building in Charlotte that we bought early this year where the tenant had a short-term lease there. We are actively looking that tenant may or may not stay. We don’t really have a good read. It’s a large European conglomerate that typically moves slowly. So we are looking to backfill that space.

We think, again, the market is very tight there. There’s a lot of tenant activity. So we think we’ll do really well backfilling that, if that’s the direction we go. And that’s kind of in July-August lease expiration. And then we’re the only other expiration in 2022 is about 63,000 feet, I believe, which is actually the tenant that we’re more than doubling their space and going into the pre-lease building that’s going to deliver later in the quarter. They need that 63,000 square feet for overlap, so the reality is that space, even though the lease comes up, they’re going to stay over as part of kind of the pre-leasing of the new building. They’re going to stay over in that space into 2023. So we’re not even going to get that space back likely until sometime in the first or early second quarter of 2023.

Operator

And the next question is from Emmanuel Korchman from Citi.

Emmanuel Korchman

Just maybe sticking to the recent Charlotte acquisition. So if I just quickly Google the address, it looks like you’ve got your marketing docs, and it was built in 2019, but it doesn’t look like it was ever occupied until, I guess, this conglomerate that you just mentioned occupied it though that’s unclear because some places you say it was never occupied and others, it has a short-term lease. I guess if I’m right, and it wasn’t occupied sort of at delivery, why not? We’re hearing everywhere that if supply has tightened, it’s so easy to lease industrial. Why would this building in particular not have leased more quickly, unless I’m just wrong in my analysis?

Michael Gamzon

Yes. So I think this building. Again, I don’t have the date exactly; I think in effect, it really delivered late 2019 and early 2020. There has been a tenant; the Company that’s in it has been in it for more than a year. I’d say so it kind of delivered at the start of COVID or just right before COVID hit. I think Charlotte was a market during COVID that there were a lot of deliveries in 2019, early 2020.

I think we bought another building in Charlotte, if you remember, a 400,000-foot building that delivered sort of similarly and was half leased when we bought it, and we fairly quickly leased up the second half in middle or late 2021. And so I think there was number of deliveries in Charlotte. COVID happened. I think Charlotte, certain markets kind of turned on kind of three to five months after the onset of COVID with kind of the scramble for last mile health care and other things was kind of that initial onset in 2020.

And I think in Charlotte that happened a little bit later, we saw that through the market. And then 2021, things got very active in Charlotte. And like I said, the building we bought was half leased and then we bought it and fully leased it. And very quickly, a lot of buildings that were kind of 200,000 to 400,000 square feet that had vacancy at the start of 2020, all got absorbed really quickly. And when we bought the other building in the 400,000-foot building with 200,000 feet vacant, we saw tremendous activity, a number of buildings we thought would see competitive buildings soon to be absorbed, and we’d be in a great position, and that worked out with that deal.

So I don’t think there’s anything particular to this building. I think the Charlotte market had a decent number of deliveries. I think it slowed in COVID like most markets did well for a while, Charlotte like certain markets take a little bit while and get back into gear. But frankly, it’s been super active in leasing in Charlotte, and that market has done really well. So I don’t think there’s anything building specific. I think that was sort of the history of the Charlotte market for the last couple of years.

Operator

And the next question will come from Mitch Germain with JMP Securities.

Mitch Germain

What’s the pro forma balance? Obviously, you’re paying down some debt with the term loan. What debt specifically being paid down? Like how should I think about the pro forma balance sheet after that transaction?

Jon Clark

So Mitch, it is Jon Clark. We’re going to take out the first four mortgages that we would have on our maturity schedule. We’ll take that out in May. So it basically will satisfy all of our near-term mortgage maturities. About $62 million.

Mitch Germain

Doesn’t touch the construction loan? Or is that part of that?

Michael Gamzon

No, we’re not going to touch that. The construction loan is a pretty inexpensive borrowing for us. So at least for now, we’re not going to touch that one.

Mitch Germain

And if I consider, I think you guys are baking in about 3.5% growth in NOI quarter-over-quarter. Is that really just a function of there’s just not as much activity that kind of happened since the start of the year. How should I think about that forecast?

Jon Clark

Yes, I think you hit it. Again, if you look at what we’ve leased up and when new deliveries are happening, we’ve had a little bit, as our schedule shows a couple of projects with slight delays. So kind of from first quarter to second quarter, other than kind of natural growth in certain rents, there’s not a huge amount of new buildings or new leasing that’s hitting versus the first quarter. We do think we’re going to be adding projects into the second half of the year as well as kicking in some of the rent growth from renewals and other things that will start to impact later in the year as well.

Mitch Germain

Great. And then I didn’t miss, you haven’t disclosed the price of the Orlando and Palm Beach assets, right?

Jon Clark

No. Since we still haven’t finished due diligence. The seller requested that we don’t give the purchase price or too much specific about it. In general, what I’d say is the cap rate is more or less in line with kind of the past couple full-year leased building acquisitions we’ve done within the ballpark of where those are.

Mitch Germain

Got you. And then last question for me. The Office flex sale seems to be positive on the activity so far. The fact that it’s under unencumbered certainly helps. But is the buyer pool that you’re talking to change at all versus what maybe your expectations were because of some of the debt market volatility.

Michael Gamzon

I’ll take that, Jon. I think the buyer pool has been quite good. We really haven’t seen a change versus our expectations going into it. We launched it, I think, mid-March or third week of March or so, we kind of hit the market. And we haven’t seen any drop-off in the buyer pool or change into what we expected. I think we’ve been probably a little bit more pleasantly surprised with the level of interest in a number of buyers. Again, I’ll caveat that it’s a relatively small sale. The book value is, I think, $6.5-plus million. We think we’ll do decently better than book value, but it’s still a relatively small sale, but we’ve been pleased with what we’ve seen so far.

Operator

The next question is from Brian Hollenden with Aegis Capital.

Brian Hollenden

How do the local officials in markets that you’re in reacting to kind of this increased demand for industrial space. Are they making it more difficult to build? Or is finding properly zoned land, the primary hurdle to increase supply?

Michael Gamzon

Yes. I think it’s both in your question, which is most areas where we’re looking to put industrial, it’s increasingly harder to do. One, the property zoned sites just aren’t really there and available for the most part in kind of the best locations. So you’re really working to find good opportunities to do that, but you kind of hit it on the first part, a lot of towns are pushing back or have been pushing back in Lehigh Valley, I think it’s been five- or six-year evolution of increasingly more difficult and restrictive zoning requirements.

I don’t believe in any of the townships in kind of the two counties that make up the quarterly high value market that you can develop industrial by right. I think it’s a special exception or conditional use in every town chip. A couple of the cities are a little bit easier, but that’s a pretty small piece of it. So that’s very difficult. And in other markets we’re in, whether it’s Connecticut markets we’re not in like Southern New Jersey, there’s increasing opposition to more and more industrial. And so they just make it a little bit harder to get the approval. So I think that’s why everything we own, we think is really valuable. And we think over time, it’s going to continue to increase in value because everything is being pushed further and further away from where populations are in the most advantageous locations to distribute, it’s a NIMBY issue, people don’t want it in their backyard much as they want two-hour delivery, they just don’t want it to come from next to their house.

And so it is a challenge, but there are sites you can find, and we’re working through the site we actually did a build-to-suit for Amazon on was a rezoning we did in Charlotte. So certain markets are a little bit easier than others, but they’re all getting more difficult. The first development we did in Charlotte was an area in Northeast of Charlotte, and that region now has sort of a moratorium on spec building. It’s allowed but that you can’t get sewer capacity, allocate it to your site without having a tenant and justifying the number of jobs. So there’s all kinds of road blocks that are up that make it increasingly difficult, which, again, we think if you can find the land and entitle it as well as existing properties will continue to increase in value.

Brian Hollenden

Thanks for that color. Last one for me, kind of a macro question. Do you think we are at the beginning of a much longer cycle of U.S. companies on shoring? And overall, how many years before supply matches demand and just sort of price increases normalize in your opinion?

Jon Clark

Yes. Again, I would say that this ends up being more in my opinion, and some of this is outside my core area of expertise. What is on manufacturing is I think companies take a lot of investment and time to figure out your most efficient manufacturing footprint and how to do it. So I think there clearly seems to be a trend over time to at least have more distributed manufacturing. So you’re not reliant on one port or one region that may or may not go into lockdowns. It seems logical. What I’d say is we are seeing manufacturing growth in markets we’re in is some of that onshore or some of that just general growth in the U.S. economy, Hard to tell.

Again, I’ll go back to Charlotte, where there’s a former Philip Morris plant that underutilized a couple of thousand acre site that had lots of excess land, Philip Morris 20 years ago, closed it down. In the last couple of years, that site, which is close to three buildings we own in Charlotte. The Charlotte market has attracted a huge number of manufacturing, and it includes an Asian kitchen cabinet manufacturer that we located there to produce kitchen cabinets, local to be closer to, obviously, where their end use is. Redbull has put a major beverage manufacturing facility there, Ballcorp to help supply that Red Boat facility, but also to supply the region, and then put a can manufacturing facility there. Most recently, Eli Lilly announced a couple of billion dollar investment in a pharmaceutical plant there.

So I don’t think a lot of that’s reshoring other than maybe the furniture company, but it is just showing good manufacturing growth in the markets we’re in. In terms of kind of thinking longer term in supply and demand, I think it’s hard to predict when that evens out. I think it’s kind of just a general macroeconomic question. I think e-commerce is going to continue to grow as a share of consumer spending. I think, obviously, after an unusual burst in 2020 and 2021.

In general bricks-and-mortar retail is probably growing a little faster in 2022 than 2021. It’s what the data shows. But it just seems e-commerce is going to continue to grow. I mentioned the Macy’s investment and other things. But again, I think companies are going to continue to focus on their supply chains and supply chain efficiency, and we think that continues to be a longer-term tailwind. And coupled with some of the comments earlier about supply delay in construction is going to continue for at least the next 12 to 18 months.

It may normalize after that, but I think it’s going to still be a fairly slow development process. It used to be a couple of years ago, you could start a building, and start the site work can be done in nine months. Today, it takes you a year to get certain components to begin with. So you’re really looking at 12 to 15 months, plus the front end is taking longer, as I mentioned permitting and entitlement time. So we still think the supply is going to be slower to deliver than in the past that will continue.

So I think there’s still lot of really strong demand drivers out there. I think supply is going to continue to have struggled to meet that in the near term. I think it’s difficult to predict what the overall economy will do, but just general economic growth pushes industrial, housing continues to grow, that’s going to drive industrial. And so we think there are just many levers that will continue to provide underlying demand, whether 15%-20% rent growth, it’s probably not sustainable for five years in a row, but it feels pretty good for the next couple of quarters for sure.

Operator

[Operator Instructions] The next question is a follow-up question from Emmanuel Korchman from Citi.

Emmanuel Korchman

Jon, one for you. Just how much work have you done? And where are you in the process of moving up the accounting systems to allow you to report sort of closer to the peer group here we are into I don’t know like the 18th week of earnings for me though, we’re not that far in. But where are you in the progress of getting the numbers out to us sooner.

Jon Clark

Thanks, Manny, for the question. We went live with the accounting system this quarter. So this wasn’t the quarter for us to move things up, but we had really good success from it. And the team is pretty excited about moving earnings calls up a little bit. So hopefully, we can shorten that time line for the 2Q or 3Q.

Operator

Thank you, ladies and gentlemen. With no more questions, this concludes INDUS Realty Trust’s 2022 first quarter earnings conference call. We thank you for joining us and enjoy your week. Take care.