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Edited Transcript of WIR.U.TO earnings conference call or presentation 8-Aug-19 1:30pm GMT

Q2 2019 WPT Industrial Real Estate Investment Trust Earnings Call

Totonto Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of WPT Industrial Real Estate Investment Trust earnings conference call or presentation Thursday, August 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Judd K. Gilats

WPT Industrial Real Estate Investment Trust - CFO

* Matthew J. Cimino

WPT Industrial Real Estate Investment Trust - COO, General Counsel & Secretary

* Scott Timothy Frederiksen

WPT Industrial Real Estate Investment Trust - Chairman & CEO

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Conference Call Participants

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* Chris Couprie

CIBC World Markets Corp. - Analyst

* Michael Markidis

Desjardins Securities Inc., Research Division - Real Estate Analyst

* Troy Raymond MacLean

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to WPT Industrial REIT's Second Quarter 2019 Conference Call.

Before we begin, let me remind everyone that during this conference call, management may make statements that contain forward-looking information. This forward-looking information is based on a number of assumptions and is subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those disclosed or implied. We direct you to the company's earnings release, MD&A and other securities filings for additional information about these assumptions, risks and uncertainties.

Please note, this event is being recorded.

I'd now like turn the meeting over to Mr. Scott Frederiksen, Chief Executive Officer. Please go ahead, Mr. Frederiksen.

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [2]

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Good morning, and thank you for joining us. With me today are Judd Gilats, the REIT CFO; Matt Cimino, the REIT COO; and Spencer Gerberding, Senior VP of Asset Management.

For the second quarter, we produced solid operating results and meaningful acquisition growth. I want to highlight a couple of areas before turning things over to Judd. Operationally, we continue to renew nearly all of our expiring leases with meaningful re-leasing spreads and annual rent escalations. The positive leasing activities also led to a $0.48 increase in our book value per unit. Lastly, we're pleased to announce the REIT's recent agreement to acquire a 1.5 million square foot modern, high-function distribution portfolio located in 3 strategic U.S. markets. These new properties were sourced on an off-market basis through the REIT's private capital pipeline.

With that preview, I'll now turn things over to Judd to discuss the REIT's financial results in more detail. Judd?

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Judd K. Gilats, WPT Industrial Real Estate Investment Trust - CFO [3]

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Thanks, Scott, and good morning, everyone. Before I begin, let me remind everyone that all figures discussed today are stated in U.S. dollars.

Total investment properties revenue for the 3- and 6-month periods ended June 30 increased 28.5% and 20.1% over last year primarily due to contributions from 2018 and 2019 acquisitions, increased base rent and higher recoveries of operating expenses. The REIT also earned fee revenue of $358,000 and $849,000 in the quarter and year-to-date from the management of third-party capital. Fee revenue this quarter did not include any [promote] or performance fees. The REIT expects to earn a promote in the third quarter related to the acquisition of the 4 private capital assets Scott mentioned.

Net operating income for the 3- and 6-month period ended June 30 was up 27.6% and 19.1% from last year, and same properties NOI was up 4.1% and 3.8% for the 3 and 6 months ended June 30. From a valuation standpoint, we recognized a $32.8 million increase in fair value to our investment properties during the quarter. Most of this increase can be attributed to our recent leasing activity.

G&A expenses for the quarter, excluding any fair value adjustments, were approximately $2.8 million for the quarter. FFO and AFFO for the quarter were up 18.5% and 3.8%, respectively, compared with the same period in 2018. FFO and AFFO per unit for the quarter were down 4.5% and 15.7%, impacted in part by a 26.1% increase in the weighted average number of units outstanding. AFFO per unit was also impacted by $979,000 or $0.016 per unit of free rent.

Our ACFO payout ratio for the quarter was 98.9% compared to 93.1% in the same period last year. The increase was mainly due to the impact of free rent in the period and the effects of the internalization in the third quarter of 2018.

Our balance sheet and liquidity positions remain strong at June 30 with a debt-to-gross book value ratio of 45.0%. Our weighted average term to maturity for total debt was 3.4 years with a weighted average effective interest rate on outstanding debt of 3.8%. At quarter end, we had capacity of approximately $138 million and availability of $85.3 million on our credit facility, in addition to cash on hand of $13.8 million.

As Scott mentioned, subsequent to quarter end, on August 7, 2019, the REIT reached an agreement to acquire 4 100%-occupied modern distribution properties totaling 1.5 million square feet of GLA for a purchase price of $109.3 million, exclusive of credits, closing and transaction costs. The acquisition is expected to close in the third quarter of 2019 and will be immediately accretive to the REIT's AFFO.

I'll now turn things over to Matt to provide an operations update.

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Matthew J. Cimino, WPT Industrial Real Estate Investment Trust - COO, General Counsel & Secretary [4]

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Thanks, Judd. Good morning, everyone. We had a productive quarter on the leasing front with the REIT leasing 97.9% of the approximately 1 million square feet of leases expiring in the quarter. We also renewed or re-leased approximately 1.1 million square feet of space set to expire after June 30. As a result, the REIT ended the quarter with occupancy hitting 99.4%, while reducing the remaining lease expirations in 2019 and 2020 to 1.5% and 4.2%, respectively, [of] portfolio GLA.

For the leases commencing in the second quarter, the REIT achieved a weighted average cash re-leasing spread of 5.1% and a straight-line rent re-leasing spread of 10.4%. We also increased our portfolio weighted average remaining lease term to 4.9 years.

On the development front, progress continues on the 105,000 square foot expansion at our 2440 Midpoint property with an expected completion in late fall of 2019. We also continue to see progress on a number of development and value-add projects within our private capital pipeline, and we expect the private capital pipeline to be a continued source of high-quality, off-market acquisition opportunities for the REIT.

And with that, I'll now turn things back to Scott to wrap up.

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [5]

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Thanks, Matt. Our results this quarter are a continued testament to the high demand for quality industrial properties, and the recently announced acquisitions are a continued testament to the value proposition of the REIT's private capital platform.

As we look to the balance of the year, we'll remain focused on disciplined, long-term capital allocation and the continued growth of our private capital assets under management.

Thanks for your time and attention. We'd now be pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Troy MacLean with BMO Capital Markets.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [2]

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Just curious on the potential for asset sales. Can you give any guidance about how big that disposition program could be or what type of assets you're looking to dispose of?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [3]

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Yes. Sure, Troy. So we've got a handful of things that are at various stages of completion. As you know, we sold our Sumner Way asset, so that one's in the books. We've been talking about selling our office project for years since we outgrew it and moved out of it. So I can confirm at this point that, that office project, which is the only office project in the REIT's portfolio, is officially on the market. And so we expect something to happen in the not-too-distant future there. And then there's a handful of others, but it's a little early to start talking specifics on some of those that are behind the office project.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [4]

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And then like, are you -- I guess, what do you -- with the recent acquisitions and the kind of properties you're looking to sell, do you have any kind of guidance about what you want the portfolio to look like on either like an age basis or a clear height? Like is this also about getting the -- just improving the overall portfolio quality?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [5]

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Yes. I mean look, I think, for us, it's been a continual flight to higher-quality assets and increasing the geographic footprint. So obviously, selling things like Sumner Way, which we said before was our only building on leased-out land and in the submarket of Kansas City that wasn't on Main, and the office project that is obviously noncore to an industrial REIT strategy, I mean that pruning is obvious. Some of the other things -- we sold an asset 1 year or 2 ago. That was one of our oldest assets. So we're always looking at functionality. And I'd say functionality trumps age. We'd rather own an older building in a great location that's highly functional than a newer building in a tertiary location that's not as functional. So it's a holistic view of every asset, and we go through every asset with our asset management team every month and talk about every one, frankly. So it's -- and again, there's a few things that are on the radar screen that are behind [Baker] that you may see sell in 2020.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [6]

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And then just on this promote, will there be any increase in G&A because of either bonuses to employees? And then just kind of wondered, like, what the net impact would be on the quarter.

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Judd K. Gilats, WPT Industrial Real Estate Investment Trust - CFO [7]

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Yes. We -- Troy, this is Judd. We do expect that we'll see that, that promote will hit in Q3, and it will be similar to the last 2 that we've had. There will be an impact to G&A as well too with that, and we'll call that out when it happens. And in terms of the impact, it's going to be dependent a little bit on the actual timing of the sale, but it's probably in line with what we've done previously.

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Troy Raymond MacLean, BMO Capital Markets Equity Research - Analyst [8]

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And then just finally on that. How will that impact -- once those properties are sold, how will that impact kind of the run rate fee guidance you've given in the past?

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Judd K. Gilats, WPT Industrial Real Estate Investment Trust - CFO [9]

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We still think with the promote we will see for the year, we're in the $3 million to $3.5 million range for gross fees. And it's a little early at this point to be projecting out what the run rate is going forward beyond that.

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Operator [10]

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And the next question comes from Mike Markidis with Desjardins.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [11]

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I know Troy sort of addressed this, and you're hesitant to give a little of bit detail in terms of the specific assets, but I guess 2 questions on dispositions. Rough value, what would you guys be carrying the office property on the books for? Would be the first. And then secondly, just as you kind of -- I know it's preliminary, but looking at all the other things that you got sort of going on inside the kitchen, what would be the sort of potential quantum of sales, a range that you'd be contemplating for 2020?

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Judd K. Gilats, WPT Industrial Real Estate Investment Trust - CFO [12]

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Mike, this is Judd. Given that it's an active marketing process, we don't want to put out what the carrying value is on the office property, what we hope to sell for, anything like that. We're -- but that material is out there and into buyers' hands at this point. We don't want to give them any more information than we need to on where we're carrying the asset. Hopefully, we'll have an update when we get on the phone in 90 days.

How about Scott talk about the...

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [13]

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Yes. Then again, I'm hesitant to start listing out guidance for dispositions. I know a lot of people do that. They say, "We're going to dispose of x million or x hundred million this year." We've got -- as you know, the buildings are big. The tenants are big. And so even a few assets can have a meaningful impact on overall leverage and things like that. So it's too early to get into those discussions. Appreciate you asking, but I'm a little uncomfortable putting out guidance.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [14]

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Okay. On the private capital pipeline. I guess the 4 assets that you agreed to acquire, it's coming from the AIMCo-only bucket, not the JV. Could you tell us what's left in terms of things that are ongoing in that -- sort of that stream or bucket?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [15]

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Yes. So I think when we announced that, the internalization [at] well over a year ago, we said there was roughly 4 million feet in that AIMCo separate account bucket. And we bought a little bit of asset. We're buying another 1.5 million feet. That would leave about 2 million feet left in that bucket. And then of course, in addition to that, we've got a variety of different assets at various stages of completion. Some of them are up to a 1- or 2-year process between when we start or are starting on the path of creating a new piece of real estate and when we actually get it in the pipeline. But know that there's stuff being added on the backside as well.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [16]

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Within the AIMCo managed account?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [17]

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Within the AIMCo and the venture.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [18]

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Okay. Okay. I haven't had the chance to dig through your disclosures. Is that AUM sort of figure [of] activity, is that easy to find now in the MD&A? Or...

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [19]

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No. It's not in there. So you'll take a long time to try to find it. And you know, Mike. We've talked about this. I mean we're still getting our sea legs under us in terms of trying to give you what you need to produce your models and investors a good insight and without kind of breaching confidentiality of our LPs and disclosing trade secrets and deals that we're actively pursuing. So that's -- we're still trying to figure that out.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [20]

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All right. Okay. I'll try one more. With respect to the leases that you've locked down, I mean we know that you've made great progress in terms of getting your remaining expiry profile down to a small amount for the remainder of this year and 2020. If I were to ask on the activity that hasn't yet commenced where you've locked down a renewal, so that would be the stuff in the second half '19 and then the stuff that you got coming on thus far for 2020. 2 questions: a, what would be the volume of stuff that's set to come online? And b, how would the re-leasing spreads, both on a cash and straight-line basis, just where would they be?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [21]

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Yes. I mean I think that's said in this section that we had, well, I think, close to 1 million feet that were just going to -- that was set to expire after the quarter that we've renewed. And so you would know it more than anybody, we had quite a few leases in '20, and those are all, for the most part, addressed at this point. I would expect the re-leasing spreads -- I don't have it at my fingertips for those future leases, but I think it will be in the ZIP code of what we just announced for this quarter.

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Matthew J. Cimino, WPT Industrial Real Estate Investment Trust - COO, General Counsel & Secretary [22]

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Yes. Then Mike, this is Matt. This is to follow up. I think in terms of the heavy lifting that we've done with respect to '19 renewals and really even '20 renewals, if you think about larger leases, something in excess of 100,000 feet, we're really down to 1 lease in 2020 of that size range, which is a June 2020 expiry. So we're not even really into the throes of that conversation. So we chipped away at a lot. So I mean there isn't anything upside that's really coming through in '19 and '20. And I think that the activity that we add post quarter, which you'll see in our next release, is tracking, I think, generally speaking, in terms of the same spread. So I don't think we'd see a material deviation from them.

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Michael Markidis, Desjardins Securities Inc., Research Division - Real Estate Analyst [23]

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Okay. Yes. I just -- because with all the -- I know you guys have given details in the past. It's just that sometimes the commencement dates, even though it's -- you bring forward the commencement date on a future expiry and all that stuff. So I'm just trying to get a little bit more color, but appreciate that.

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Operator [24]

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And the next question comes from Chris Couprie of CIBC.

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Chris Couprie, CIBC World Markets Corp. - Analyst [25]

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I just wanted to circle back to the private capital pipeline. I think in the last quarter, you guys initiated investment with the new AIMCo JV. I believe it was in New Jersey. Is that right?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [26]

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Yes. Absolutely. You're talking about in Q1, right?

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Chris Couprie, CIBC World Markets Corp. - Analyst [27]

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Yes. In Q1, yes. So is that the same Bayonne projects that are in the existing AIMCo pipeline or the legacy pipeline?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [28]

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It was two things. When we announced the, I guess, the internalization and the pipeline and named buildings, I'm trying to remember, they all might have been named in that. And so again, part of the issue and beyond was there was a lot of site work that went in before the building started its vertical construction phase. And that is in the venture and always has been. So that's not part of the AIMCo separate account. That is in the venture. And the actual closing and construction -- the vertical construction component started in Q1. And at this point, there's 1 existing building. And that's basically, the retrofit and rehab of that building is complete. We've got good leasing activity on that. And the new building, the bigger one that we're building next to it, the walls are most of the way up at this point. So we've made significant progress on that.

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Chris Couprie, CIBC World Markets Corp. - Analyst [29]

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Okay. And then just in terms of other activity with the CPP-AIMCo JV, anything of note to discuss?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [30]

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Yes. It's just stuff on the pipeline but nothing we're ready to trumpet today, Chris.

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Chris Couprie, CIBC World Markets Corp. - Analyst [31]

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Okay. All right. The Orlando property, is there a lease-up progress there?

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [32]

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There is not at this point. I mean when we got the space back, there was -- there's been some discussions with the tenant next door. There's been some tenant cleanup. There wasn't even a dividing wall separating the space when we bought the building. And at this point, that's -- boy, we're 99% leased. They're 99.4% I think that's the biggest vacancy in the portfolio at this point at 50,000 feet. So yes, we're paying attention to it. We're digging in, but nothing to report yet.

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Operator [33]

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Thank you. That concludes the question-and-answer session. I would like to return the floor to Mr. Frederiksen for any closing comments.

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Scott Timothy Frederiksen, WPT Industrial Real Estate Investment Trust - Chairman & CEO [34]

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Okay. Great. Thanks, everyone, for your time and your attention in WPT Industrial REIT. As I always say, if you have any questions, pick up the phone and call any of us at any time and we'd be happy to chat. Thanks again.

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Operator [35]

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Thank you. The conference has now concluded. Thank you participating in today's presentation. You may now disconnect your lines.