LXP Industrial Trust (LXP) Q2 2021 Earnings Report, Transcript and Summary

Good morning and welcome to the Lexington Realty Trust Second Quarter 2021 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Heather Gentry Investor Relations. Please go ahead.

Thank you, operator. Welcome to Lexington Realty Trust's Second Quarter 2021 Conference Call and Webcast. The earnings release was distributed this morning and, both the release and quarterly supplemental, are available on our website in the Investors section and will be furnished to the SEC on a Form 8-K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Lexington believes that these statements are based on reasonable assumptions, however, certain factors and risks including those included in today's earnings press release and those described in reports that Lexington files with the SEC from time to time could cause Lexington's actual results to differ materially from those expressed or implied by such statements. Except as required by law, Lexington does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, Lexington has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure. Any references in these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unit holders on a fully diluted basis. Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington's historical or future financial performance, financial position or cash flows. On today's call, Will Eglin, Chairman and CEO; Beth Boulerice, CFO; and Brendan Mullinix, CIO will provide a recent business update and commentary on second quarter results. Executive Vice President, James Dudley will be available during the Q&A portion of our call. I will now turn the call over to Will.

Thanks, Heather. Good morning, everyone. We had a terrific second quarter with excellent results in all areas of our business. Our business continues to produce funds from operations well in excess of our dividend, and our net asset value per share is steadily growing, a strong rent growth, increasing construction costs and attractive debt financing drive property values higher. Leasing continues to be a particularly bright spot for us and is further evidence of the quality of our industrial portfolio and strong fundamentals in the industrial sector. We leased roughly 1.1 million square feet in the quarter with industrial base and cash base rents increasing approximately 13% and 7% respectively on four lease extensions. July proved to be another exceptionally strong month of leasing with over 2 million square feet of activity. We have secured a five year lease with a new tenant at our previously vacant 640,000 square foot warehouse distribution facility in Statesville, North Carolina with 3.4% cash base rent increase over the prior lease and 3% annual escalations. We also secured a three year lease term with a new tenant at our 1.2 million square foot industrial facility in Olive Branch, Mississippi. The new cash base rent represents a 1.7% increase over the prior rent with 2.25% annual bumps. With little downtime to lease a lot of square footage in a competitive market, this transaction is a big win and a testament to our asset management capabilities. We continue to proactively create leasing opportunities as we address forward lease rollover. With one of our 2023 expirations, we just signed a 10.5 year lease with a new tenant at one of our warehouse distribution facilities in the Cincinnati market. This was a great outcome as we replaced a tenant that was a move-out risk, increased the cash base rent approximately 27% and extended the overall lease term. In addition, we had a great outcome with respect to our first quarter industrial purchase in Lakeland, Florida. The property was acquired with 105,000 square feet of vacancy as part of our strategy to take advantage of industrial demand and rising rents and provide more attractive, stabilized yields compared to investing in fully leased buildings. In July, we leased roughly 68,000 square feet of the vacant space for a five-year term to a new tenant with a starting rent of $5.70 a foot with 3% annual bumps representing an occupancy increase from 53% to 84%. Our strong leasing outcomes are primary driver behind increasing both the low and high end of our 2021 adjusted company FFO guidance range by a penny to a new range of $0.74 to $0.77 per diluted common share. Moving to dispositions; during the quarter we sold three properties for approximately $125 million. These dispositions included two office sales and our Laurens, South Carolina legacy industrial asset. At June 30, total consolidated sales volume totaled $183 million at GAAP and cash cap rates of 7.3% and 7.9% respectively. Subsequent to quarter-end, we disposed of three non-industrial properties valued at $35 million leaving just 11 office and other properties remaining excluding our ground lease Palo Alto property. These 11 assets generated net operating income of approximately $8 million during the first six months of 2021 and we currently value these assets within a range of $150 million to $190 million. Investment activity has been robust to date with $275 million close as of June 30 at GAAP and cash estimated stabilized cap rates of 5.1% and 5% respectively. The start of the third quarter has also been active with $106 million closed in July and another $106 million currently under contract that is expected to close later in the quarter. In a competitive industrial market, we continue to view development projects and the purchase of vacancy as compelling opportunities to capture attractive stabilized yields for quality product in our target markets. Construction is fully underway at our development projects in sub-markets of Indianapolis and Central Florida and our Atlanta project achieved substantial completion of the base building during the second quarter. We have strong leasing prospects at this facility, and are currently responding to RFPs. Subsequent to the quarter, we committed to a development opportunity in Greenville, Spartanburg. Our development projects in progress are expected to require funding of approximately $271 million and our forward equity sales match up well for the funding of these projects. We've nearly completed our portfolio transition with our industrial portfolio now representing 94% of our gross real estate assets excluding held for sale assets. The work we have done on the portfolio has paid off and we're extremely pleased with how the portfolio continues to perform and be shaped through the purchase and development of modern high quality Class-A warehouse distribution product in our target markets. With that, I'll turn the call over to Brendan to discuss recent investments in our development pipeline.

Thanks, Will. Second quarter acquisitions included seven industrial facilities for $205 million, a GAAP and cash estimated stabilized cap rates of 4.8% and 4.7% respectively. During the quarter, we added to our portfolio holdings in Southeast Houston with the purchase of a three-property stabilized portfolio totaling 739,000 square feet. All three properties were built in 2019 to modern specs with two of the facilities located in the Bayport North industrial park and the third facility close by. We like this area of Houston due to its close proximity to the Port of Houston and the Barbours Cut and Bayport Container Terminals. This portfolio acquisition also complements our two distribution centers located in the Bayport South Business Park. Additionally, we acquired recently constructed 195,000 square foot stabilized facility in North West Cincinnati. The property is in a master plan business park right on I-75 where we own an additional 2.4 million square feet of Class A distribution space. Adding to our presence in Central Florida, we purchased 510,000 square feet shell in Lakeland that we are currently marketing for lease. The property is located in Cross County Line Road from the Lakeland facility we acquired in the first quarter. As Will noted earlier, leasing activity has been positive at that partially stabilized facility and we have begun to see promising activity at this location. We are working towards the stabilized cash yield forecasted to be approximately 5%. Our two new acquisitions in the Greenville, Spartanburg market are both located in the Smiths Farms Industrial Park in Greer. One of these facilities has approximately 80,000 square feet of vacancy providing us the opportunity to fully stabilize the property in a rising rental rate environment. The buildings are located off Highway 101 in Greenville, Spartanburg's primary and largest submarket Spartanburg West with proximity to I-85, the Greer Inland Port, BMW's largest and most productive manufacturing plant and the Greenville Spartanburg International Airport. Additionally, the market's strategic location allows for ease of access to both the Port of Charleston and the Port of Savannah and is within two hours of the major metropolitan markets of Atlanta and Charlotte. A conviction about this market is further evidenced by the purchase of a nearby four-property portfolio in Greer that we closed subsequent to quarter end. The approximately 1 million square foot portfolio consists of three stabilized properties and one vacant property. All the facilities have been built within the last two years with the vacant facility, the newest of the four, built earlier this year. We've had considerable tenant interest in the space and are currently responding to several RFPs for full and partial building users. Turning to our development activities; we currently have four active Spec deals in progress and we expect our build-to-suit in the Phoenix submarket of Goodyear to be completed later this year. As Will highlighted, our 910,000 square foot Atlanta project that reached substantial completion on the base building in the second quarter has seen strong leasing activity with multiple active prospects interested in the full building. Atlanta, as well as the submarket the facility is located, continue to post record positive absorption rates. As mentioned on last quarter's call, we commenced development in the second quarter of a 1.1 million square foot facility in the Indianapolis submarket of Mt. Comfort. The project is still expected to reach substantial completion in the second quarter of 2022 at an estimated cost of roughly $60 million. Subsequent to the quarter, we began funding our projects in Greenville Spartanburg. We're excited to further expand our footprint in this market with this 234-acre site that is also located in the Smith Farms Industrial Park. The project will consist of three Class-A warehouse distribution facilities totaling 1.9 million square feet. The facilities will have staggered deliveries over the course of the first half of 2022. The estimated development cost is approximately $133 million. Like our Spec projects in Atlanta, Indianapolis in Central Florida, the Greenville Spartanburg development will feature market leading specs with respect to clear heights, efficient site plans, truck court depths, building depths and column spacing and ample trailer and car parking to meet the demands of a host of logistics users. Our estimated stabilized cash yield in our Spec projects are projected to be in the low to mid 5% range, which assumes 100% occupancy in payment of our partner promoter. We'll continue to provide regular updates on the progress of these projects. With that, I'll turn the call over to Beth to discuss financial results.

Thanks, Brendan. In the second quarter, we generated adjusted company FFO of approximately $52 million or $0.18 per diluted common share. Revenues were $81.5 million with property operating expenses of approximately $12 million of which roughly 86% was attributable to tenant reimbursements. G&A for the quarter was $7.9 million dollars and we now expect our 2021 G&A to be within a range of $32 million to $34 million. Our same-store portfolio was 97.4% leased at quarter-end with our overall same-store NOI increasing 0.9% which would have been approximately 2.1% excluding single-tenant vacancy. Industrial same-store NOI increased 1.7% and would have been 3% excluding single-tenant vacancy. At quarter-end, approximately 89% of our industrial portfolio leases had escalations with an average rate of 2.4%. On the capital markets front, during the quarter, we entered into contracts for the sale of 16 million common shares for initial settlement amount of approximately $194 million in a forward equity raise. These shares have not yet settled and the contracts mature in May 2022. As of June 30 we had $285 million or 24.6 million common shares of unsettled forward common share sale contracts including those under our ATM program. Subsequent to the quarter, we redeemed approximately $1.6 million operating partnership units in connection with the disposition of the three properties subsequent to the quarter that Will referenced. This transaction further reduced our non-core holdings and gave us full control of our legacy operating partnership, and the flexibility to further simplify our structure. Our balance sheet remains strong with leverage at 4.9 times net debt to adjusted EBITDA at quarter end. At quarter end, we had $125 million outstanding on our unsecured revolving credit facility and currently have $215 million outstanding. Unencumbered NOI remains high at approximately 91%. Our consolidated debt outstanding was approximately $1.5 billion with a weighted average interest rate of approximately 3.1% and a weighted average term of six years. With that, I'll turn the call back over to Will. Thanks.

I will now turn the call over to the operator who will conduct a question and answer portion of the call.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from Elvis Rodriguez of Bank of America. Please go ahead.

Good morning and thanks for taking the question. Are you able to share some details on how the acquisition pipeline is looking today versus prior quarters and maybe an update on yields?

Sure. The acquisition pipeline with respect to the number of transactions we're working on and dollar value is sort of in the $1 billion area, which is right very substantial. Most of the opportunity set that we see at the moment is sort of in the kind of 3.5 to 4.5 area. So there's been quite a bit of cap rate compression obviously this year and sort of over the last 12 months. So we're very, very happy with the body of work that we've sort of got on the books for the first seven months of the year. Our posture in the acquisition market is, I would say a little bit cautious. That's not to say that low cap rate transactions don't sort of work from a mathematical standpoint in the context of total return. Some of that is driven by financing costs where probably have 10-year financing costs of 2.25. And if you're looking at a high quality building in the market and location that we really like; if you have below market rents and conviction that rents may grow for a considerable period of time, sort of in the mid-single digits, we will have a little bit of sticker shock about cap rates, but the total return math can still work pretty well.

You bring up a good point on low cap rates today relative to last year. How are you underwriting sort of exit yields today relative to maybe six months ago? And then also how do you underwrite, so for example, you acquired a vacant asset like what are you underwriting, 12 month lease up, six month lease up. What are you underwriting to get to your target yields?

Sure. Brendan, do you want to jump in on that one?

Yes, sure. Well, in terms of the underwriting and residuals, I guess first I would say that we are long-term holders. So we're very focused on where we see the rental base is and the rental base is going forward. We do - do IRR analysis as well. Historically, I would say that, and I think most of the market typically would add something anywhere 50 basis points to your going in and going out and today that's probably more likely something like 25 basis points but we really focus on a whole host of factors including basis and rental basis when we evaluate those total returns.

Great. And then just one more for Beth, a maintenance modeling question. So in your supplemental, you added that you're going to receive a $2.6 million lease termination income payment for an office building in Dallas - Fort Worth in January '22. Just wanted to highlight - I just wanted to bring up, is there any reason or are you going to sell that building before. How should we think about modelling this payment for next year?

The payment actually occurred in the first quarter, where we received the payment then. So the termination income for that will be recognized over that year. So at the end of January, they will be out into 2022.

Thank you. That's very helpful.

The next question is from Anthony Paolone of JP Morgan. Please go ahead.

Okay, thanks, good morning. I was looking at your three spec million square foot warehouses in the development pipeline and you talked about the activity for maybe a full-building lease in Atlanta. Can you just talk about just how those were underwritten in the expectation?, was it always for single tenants in each of these properties, long-term leases, multi-tenant like what - what's the underwriting on those?

This is Brendan. So the base underwriting on all of those projects is for - with the anticipation of single-tenant users for them. That is, as we approach the spec developments, we look at it from - and start with the demand side and we have just continued to see over the last couple of years, very significant demand for large modern bulk distribution facilities. And we're building in markets that are very, very attractive attributes for that kind of use. When we go into designing the building with all what I just said, we are very careful to ensure that the building could be multi-tenanted if it needs to be. But, typically as we are marketing these projects, there is often interest from users to take portions of the building and opportunities to divide them, our preference is to keep them single-tenant. In many cases, I spoke about the demand side, but as we analyze the supply side as well, we often see that our buildings have a very competitive position because of the lack of competing large buildings that could satisfy that tenant need that gives us some competitive advantages and negotiating. So, our bias is towards holding for single-tenancy. I think that, did I miss anything of your question, Tony?

No, I think that covers it. Just curious, though than if you get a single tenant in there presumably that will be longer duration lease given the size, like where would that market cap rates you think be when you talked about that 3.5 to 4.5 kind of level in the market then. Just trying to get a sense of development spread against the word mid 5s yield that they [indiscernible]?

Yes. So what we're seeing in our markets, the values on those buildings are in those same ranges. So an asset in Atlanta, like our projects in Atlanta would be certainly below a 4 cap, and Indianapolis at this point is breaking 4, it appears right now today and Central Florida as well.

Got it. Okay, thanks. And then just my only other question is, I think it was in the last quarter, maybe, perhaps one before. You mentioned that your 2022 should really be the earnings trough as you clear out the last of the non-core stuff, you bumped up guidance a little bit today, and it sounds like your deal activity is pretty good. Do you still think '22 is a trough or you think there is prospects or maybe just having some growth next year?

I still view it as a trough. One of the real question is how quickly some of the development stuff leases up, but right now I think we would just have a conservative posture until we have some visibility around those outcomes.

Okay, great. Thank you.

Thanks, Tony.

The next question is from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Hi, good morning everybody. Maybe just a clarification on the $1.6 million OP units redeemed, where those tied specifically to those assets. Could you just give a little more color about the transaction kind of the mechanics of that?

Sure. Good morning, Craig. it's Beth. Yes, this is a great - great transaction for us. Our operating partnership we had certain limited partners there that had consent rights over certain transactions. So the 1.6 million shares, I mean OP units represents about 60% of those OP units that we had, everything was consolidated of course and with those consent rights, although we could structure around the consent rights, now what we've done is because we redeemed these units for these three properties the consent rights are no longer there. So, we no longer have to get their consent for any kind of merger or sale of a mass [ph] amount of the property. So it will simplify our structure because we can merge the operating partnership in to us. We still have some 1031s that are ongoing. So it's one of those things that we'll take maybe to the end of 2002, but it's not tied to any particular assets and the other positive thing is, it will free up our people, it will be less time consuming, there was a lot of management for it once we merge it in between K1s, distribution checks and that sort of things.

And what like - should we - this is basically just a stock buyback, right. So what price was it done at?

Well, it was an arm's length. It was an arm's length pricing, the three assets had a value of $35 million.

Craig, that was about a 7.70-cap rate and included in that lease [ph], of course. Just to put it in perspective, so we - overall we're very happy with the outcome.

Okay. And apologies for the question, I mean was 1.6 million in the share count or is this kind of a different kind of OP unit?

No, no, it's in our diluted count.

Okay, all right. And then just moving on to the same-store. So you guys did 1.7% for kind of the first six quarters I get. You know, it's 3%, if you back out the vacancy, but you're always going to have some vacancy at this point going industrial with the shorter lease terms. It seems like the escalators are getting better, you guys are, what 2.4% now and now you're kind of getting 3% on some of these. On a - as you look out longer term, what do you think the growth potential is internally from the industrial portfolio. What would be the target relative to maybe where peers are?

Well, I think Craig, you just have to have to start with the escalations we have to have built into our lease structures, right. Close to 90% of our leases have escalators in them and we've started as you know, this quarter to quarter now we're putting up quite good mark-to-market numbers, but I think it's still a tiny bit speculative to sort of forecast where we, where we might land on a quarter-to-quarter basis. Talking about same-store rent growth for a quarter or two in advance, sort of an easier thing for us to see. So directionally everything is going extremely well. And you're correct to point out that vacancy has a disproportionate impact on same-store but given what the occupancy rate was this quarter, the fact that we were able to land it where we did was a good outcome.

I mean do you think this could be a 4% to 5% growth portfolio kind of with what you guys are building and the mark-to-market potential embedded in stuff that has enrolled yet or is this going to be kind of more 3% to 4% grower? I'm just kind of trying to get a sense of, because there are some disparate kind of marks that you guys have and you have some bigger assets like the Mississippi asset that you are getting to 1.7% rent spread there, but others you get 7% for this quarter. So I'm just kind of trying to get a sense of where you think this portfolio would fit in to the landscape of the industrial group on a longer-term basis?

Well, we would tend to be more conservative at the moment. Part of that just reflects that, the sort of modern warehouse distribution portfolio of ours, which may represent sort of 60% or so of enterprise value. That's the part of the portfolio that has the best prospects for market rent growth and on a lot of the new underwriting, I think in the context of 4% to 5% is very sensible. We also have in the portfolio still, a portion of assets in manufacturing, light manufacturing and cold storage right, which are higher-yielding assets to generate a lot of free cash flow for reinvestment, but probably to be fair, have less prospects for market rent growth. So, it's really I think looking - you have to kind of look sort of deeply into the portfolio just to appreciate the rent growth dynamics.

Okay, that's helpful. And then, just one more from me. Kind of circling back to an earlier question about underwriting and I totally appreciate the point on a total return basis with where market rents are going you can clearly get returns up from kind of the initial going in yields. But when you guys are underwriting at least right now, given your kind of implied cap rate, what's the more important metric for you? is it how the assets fit in from an AFFO perspective and your ability to grow earnings or is it also looking at NAV and how long it may take to recoup the dilution, if your implied cap rate is somewhere in the low to mid 5s and your buying - let's say you start buying in the mid-4s on some of these?

Yes. I mean, I think the way we've been looking at it is; we've been okay issuing some equity to fund development right, where we have both the best opportunity to produce right high FFO and growth and we're right, we're making a good net asset value trade and we're upon stabilization, right. There's a lot of spread compression in what we own. So that's sort of been our thought around equity and the acquisition side of the business has really been more about match funding capital, capital recycling from retained cash flow and dispositions. So it's not really one of the other, Craig, both - both are important to us.

Great, thanks.

The next question is from Jon Petersen of Jefferies. Please go ahead.

Great, thanks. I just wanted to be a little more color on where cap rates are trending for the office sales that you have left to do. I think in the past, I think last quarter or the one before you guys talked about 12% cap rate on what's remaining, but it seems like you guys are trending more towards the high-single digits and some numbers, well that you gave on the alive and remaining properties also seem kind of high single-digit range. So, just curious if that's like, I guess kind of bridge that gap, is that conservatism on your part historically or have you seen cap rates compressed in the past few months for that - for those office properties?

I think we've tended to be conservative when we've talked about the overall outcome on the office disposition effort. As the pool gets smaller, we gave a pretty wide range of outcomes. Just because you have a small pool of assets and the probability of disparate outcomes is sort of higher once that portfolio gets smaller. So the midpoint from a cap rate standpoint is around 9%, which is less than sort of the 11-ish area that we've been talking about. So as it gets smaller, in some cases much better visibility, but also sort of more random outcomes, as that portfolio shrinks, we'll be able to tighten up that gap and whatever the range of outcomes are.

Okay. I think I would look at this way, but do you have any sense on your industrial portfolio of what the mark-to-market is on rents?

We do a fair amount of work looking at our rents in relation to market. We don't sort of talk publicly about what we think it is. I think we're quite cautious about trying to talk about mark-to-market beyond sort of 12 or 18 months forward. We're clearly in a position and as I was talking about before, the modern part of our warehouse distribution portfolio, there is - I think very, very strong mark-to-market opportunities, but they're less so in the legacy portfolio. So, I think we'd - I guess, rather just continue to produce good outcomes than try to predict so far into the future. When - in a portfolio that has longer weighted average lease term, your ability to mark-to-market is less than others. So, I think it's in our mind just to be a little bit cautious and not try to be overly predictive at this point.

Okay. Last question from me. The acquisitions, a couple of them, one of them was vacant. One of them was only partially leased. I'm just kind of curious as you think going forward for your acquisition strategy like what percent are you willing to - I guess maybe do more value add type deals, some stuff with some hair on it versus more stabilized income streams?

Sure. Brendan, do you want to offer commentary on that?

Yes, sure. I wouldn't say that we have a percentage that we have identified but rather that we would just look at the opportunities opportunistically where we see them making sense. As we deepened our concentrations in our target markets and started the specs of own projects as well, we're just far more comfortable underwriting lease-up opportunities and with vacancy than we had previously. And in this cap rate environment that we're seeing currently for stabilized, fully leased assets, the opportunity to buy shell where you're comfortable with the underwriting can be very compelling.

Great. Thank you.

Thanks, John.

The next question is from John Massocca of Ladenburg Thalmann. Please go ahead.

Good morning.

Hey, John.

Maybe you kind of sticking with the development pipeline and kind of potential. As you look at potential future development transactions and as you work with your partners, what are you seeing on kind of price per square foot development cost basis versus earlier this year? Have some of the inflationary pressures on cost stabilized or are they still putting kind of upward pressure on gross pricing for these types of deals?

I would say that there is continued upward pressure and there is - there is two elements to it, there is both pricing and there is also the availability of the materials. So increased pricing has the potential of course to impact your development yields. Fortunately what we've been seeing across markets is very healthy rent growth, continued rent growth, which has helped offset some of that cost inflation. And then in addition as we've been discussing on this call, we've also been seeing significant cap rate compression on stabilized assets. So the value is still compelling even with increased cost. With respect to the other element of the availability of materials, one of the things that we like about our setups with the projects that we're working on, if you're able to secure the materials and then at a pricing that makes sense for your development underwriting, that puts us ahead of competing supply. So, I think a lot of supply will be slowed down in the market in some cases, it could be a function of pricing, but in others, it will just be a matter of the availability of materials, which should allow us to deliver ahead of other competing supply, we had a better basis than those who have started later than that.

I mean, I guess as you think about it is, we've been talking about it earlier this year, I kind of felt like there was first upward trend - first upward trend, it was certainly an upward trend and kind of your input costs for development that hasn't abated at all kind of maybe since some of these initial spikes in steel and roofing and other kind of input costs?

I would say it's moderated, it hasn't ceased and it has tended to - it has shifted around a little bit. It started with steel and then it's roofing insulation materials, and then it's stock package. It's - it hasn't been one single item and so some components moderate and even pull back, but overall, we still see cost pressures which sounds negative, but again, I'll say that at the same time, we've seen healthy rent growth and we think that those dynamics should be helpful for the rental outcomes on our Spec projects where we've locked in our pricing and our materials, but also for our the existing portfolio where we - where we don't have those basic issues from a competitive standpoint in rent growth.

Understood. Apologies if I missed this earlier in the call, but can you provide any update, maybe on the expectations for improvement in leasing commission spend. Feels like it's kind of - I feel like maybe earlier in the year, the expectation was for somewhere if I'm remembering correctly $15 million or so in potential spend. It seems like you're coming in pretty much below that, so just any update there would be helpful?

John it's matter of timing really as to when projects are getting done. So we still could come into the $15 million to $25 million range for the year based on what we think when things are going to happen, but sometimes tenants do take longer to do some of the tenant improvement. So they - it may lapse into next year, but I'm still forecasting we'll have heavier second half.

Okay, understood. And then, just one last one on the OP unit transaction. Just to kind of make sure I fully understand what was going on there. Essentially when you purchased those assets, you issued OPs as part of that, so the selling of those assets is just essentially kind of the reversal of those OP, like as part of selling those assets, you basically repurchased OPs that you had issued originally when you had purchased those properties?

No. And these were these were different properties, these OP units are legacy, they have been in our portfolio for several years. These assets were assets that were purchased at different time along the way. They were just a selected to be part of this transaction that made sense for the value of the units that were being redeemed and they were non-core.

Okay, that's very helpful. Thank you very much. And that's it from me.

Thanks, John.

[Operator Instructions] The next question is from Wendy Ma of Evercore. Please go ahead.

Hi, good morning. Thank you - thank you for taking my question. So in 2Q you sold one industrial property and we are just curious what's the reason that you sell an industrial asset and also what's the key driver that the cap rate for these sale was high? Thank you.

Sure. Wendy, just from an age and sort of spec standpoint and location standpoint that asset really didn't - doesn't fit with what we're investing in now. So it was an older facility, which had some obsolescence and further obsolescence risk in it. So from the standpoint of looking at it as a sale price per square foot, it was, I think, a really, really good outcome. But just as I said just didn't fit with our current investment strategy.

Okay, good. Thank you. And sorry if I missed this before, but the operating expense for 2Q seems a little higher compared to last year and compared to 1Q. So were there any special reason behind that?

Hi Wendy, it's really a function of the new leases that we are entering into. A lot of tenants now - we are responsible for the property operating expenses and then we get reimbursed from them. So in the past, we had a lot of net lease deals where the tenants would pay directly for operating expenses and we would just get a check for the rent. Now we are paying for operating expenses and they're reimbursing us. So it's presented as a gross basis on the income statement; so that's the primary driver.

Okay, thank you. That's my question.

The next question is a follow-up from Elvis Rodriguez of Bank of America. Please go ahead.

Just a couple of quick more for me. So on the legacy portfolio, the industrial assets. How much of the 94% is would you categorize as legacy, 25%, 50%? Just trying to get understanding of where the industrial portfolio sits today relative to the legacy assets?

Yes, I mean the cold storage manufacturing and light manufacturing is all legacy, that's to think about 19% or so. And then in the warehouse distribution portfolio, we know there's some things that we would characterize as legacy as well. So maybe thinking in the context of 25% to 30% of the portfolio being sort of older vintage added to the portfolio over five years ago.

And should we consider these assets could be potential sort of funding source for newer acquisitions and development going forward?

We would view the cold storage manufacturing and light manufacturing as a source of liquidity and an alternative to capital markets from that standpoint, the legacy warehouse and distribution not necessarily, we like the buildings a lot. They just have a little bit different characteristics and would be a little bit more high-yielding and maybe with a little bit less rent growth than things that we're adding to the portfolio now. There is a handful of cases where we have building sort of outside of our regional and market footprint that we might look at as opportunities to turn those into liquidity and right in the context of how we're shaping the portfolio longer term. But I don't, I don't think that that would be a heavy amount of disposition activity in terms of aggregate dollars.

Great. And then just one more for Beth, are you able to share how you plan to deploy the forward equity, obviously the line of credit increased from quarter end and just trying to get understanding of how you plan to deploy that equity throughout the year? Thanks.

Sure. So the contracts that we have on a forward basis, they're good for a year. So when we look at that, we'll be funding our development as we go along. So the first tranche will be coming due this August in a few weeks. So we'll be bringing those shares in at that point, but the lion's share of it is good until up to May 2022 and when you think about it, when you borrowing on the line, our line right now as one month LIBOR 90 basis points, which is really attractive financing right now, where you're bringing in the share count into our earnings - diluting earnings. It's a balancing act really.

That makes sense. And can you remind us how many shares will you be deploying in August? Thanks.

Sure, so in August. It's the first tranche and that's about 3.6 million.

Thank you so much.

This concludes our question-and-answer session. I would like to turn the conference back over to Will Eglin for closing remarks.

We appreciate everyone joining us this morning. Please visit our website or contact Heather Gentry if you would like to receive our quarterly materials. In addition, as always, we hope you'll feel free to reach out to any one of us and our senior management team with any questions. Thanks again for joining us, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.