Plymouth Industrial REIT Inc

NYSE:PLYM

Earnings Call Analysis

Plymouth Industrial REIT Strengthens Growth Opportunities through Strategic Transactions

In Q3 2024, Plymouth Industrial REIT announced transformative steps to enhance growth, securing up to $500 million in acquisition capital via Sixth Street. Refinancing efforts raised borrowing capacity to $1.5 billion, addressing capital needs and setting a strong course into 2025. While facing unexpected tenant challenges, the company's leasing momentum is expected to rebound, leading to greater growth potential. A significant $1 billion pipeline spanning 11 million square feet is in view, with active acquisitions underway, indicating a robust trajectory. Fourth-quarter guidance suggests a midpoint NOI of $0.48, reinforcing optimism for continued expansion.

Transformative Changes and Growth Strategy

During the third quarter of 2024, Plymouth Industrial REIT made significant strides to enhance its growth potential. A strategic transaction with Sixth Street was announced, capitalizing on their largest portfolio through a Chicago recap joint venture. This partnership not only places a valuation on the portfolio but also allows Plymouth to secure up to $500 million for acquisitions. The refinancing of their unsecured credit facilities to $1.5 billion has markedly increased their borrowing capacity, facilitating capital deployment for expansion, particularly in their strong leasing markets. The focus for 2025 will be capitalizing on leasing opportunities and acquiring strategically aligned properties.

Navigating Tenant Challenges

In the latest quarter, Plymouth faced some unexpected tenant challenges that initially impacted their revenue. These included the eviction of tenants from properties due to sudden business closures. Despite these setbacks, management expressed confidence in overcoming these hurdles and indicated a historical trend of effective building occupancy management. An important development was a rapid response to tenant issues, including securing a replacement tenant for a previously underperforming location, which is projected to yield a 27% increase over the expiring rents. Management demonstrated readiness to swiftly fill vacancies, setting a foundation for improved momentum as 2025 approaches.

Acquisition Pipeline and Market Activity

Plymouth's acquisition pipeline has expanded dramatically, now indicating over 11 million square feet and more than $1 billion in prospective acquisitions, a significant jump from less than 1 million square feet in the previous quarter. This increase not only underscores heightened acquisition activity but also reflects their established market presence. Specific deals include a targeted portfolio in Cincinnati, which management anticipates could close before year-end, potentially contributing to revenue growth at favorable yields, similar to the recently completed Memphis portfolio. The management team remains cautiously optimistic about their ability to close various deals in their existing markets.

Projected Financial Performance

Looking ahead, Plymouth provided preliminary guidance for fourth-quarter financial performance. The expected guidance was an NOI of approximately $0.48 at the midpoint, reflecting the nonrecurring shortfall of $0.03 from this quarter. Assuming successful capital deployment and leasing efforts, Cleveland and St. Louis markets are expected to contribute positively towards earnings per share as operations normalize. Overall, management is projecting economic recovery and improvement in NOI in 2025, driven by occupancy and increased rent rates in their core markets.

Market Dynamics and Future Outlook

The national vacancy rate has remained at around 6.4%, with expectations of a potential uptick in 2025 as construction slows to the lowest absorption since 2018. This suggests a favorable leasing environment for industrial spaces. Plymouth's strategic positioning and capital capabilities ensure they are well-prepared to capitalize on emerging opportunities. Specifically, management emphasized a commitment to high-yield acquisitions and market-driven leasing strategies that will enhance their portfolio quality across key markets.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the Plymouth Industrial REIT Conference Call to review the company's results for the third quarter of 2024. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead.

[Harry Sullivan]

Thank you. Good morning. Welcome to the Plymouth Industrial REIT conference call to review the company's results for the third quarter of 2024.

Yesterday afternoon, we issued our earnings release and posted a copy of our prepared commentary and a supplemental deck on the Quarterly Results section of our Investor Relations page. In addition to these earnings documents, a copy of our 10-Q when filed can be found on the SEC filings page of the IR site. Our supplemental deck includes our full year 2024 guidance assumptions, detailed information on our operations, portfolio and balance sheet, the definitions of non-GAAP measures and reconciliations to the most comparable GAAP measures. We will reference this information in our remarks.

With me today is Jeff Witherell, Chairman and Chief Executive Officer; Anthony Saladino, Executive Vice President and Chief Financial Officer; Jim Connolly, Executive Vice President of Asset Management; and Anne Hayward, General Counsel.

I'd like to point everyone to our forward-looking statements on Page 1 of our supplemental presentation and encourage you to read them carefully. They apply to statements made in this call, our press release, our prepared commentary and in our supplemental financial information.

I'll now turn the call over to Jeff Witherell.

[Jeffrey Witherell, executive]

Thanks, Tripp. Good morning, and thank you for joining us today. I'll hit a few highlights first, and then we'll go to Q&A.

We've made some big announcements in the past few months relating to securing capital that can propel our growth. In late August, we announced the strategic transaction with Sixth Street. I view this as transformative for us in several respects. Most notably, we put a valuation marker on our largest portfolio with the Chicago recap JV and sourced capital for up to $500 million in acquisitions. We secured a tremendous partner in Sixth Street, who has continued to build out their real estate platform.

We also significantly enhanced our borrowing capacity with this month's refinancing and upsizing of our unsecured credit facilities to $1.5 billion. With this increase in the revolver and recasting of one of the term loans, we've extended our maturities and enhanced the ability to pursue other unsecured debt. The combination of Sixth Street and the additional borrowing capacity solves our current capital needs. Our focus for the balance of this year and throughout 2025 is on our leasing opportunities and putting the capital to work. That's what you can expect to hear from us in the next several quarters.

Our earnings release and prepared commentary outlined a few tenant challenges we faced during the quarter that we did not anticipate. We are confident that we will work through these and get the spaces leased. We've always done a great job of keeping our buildings well leased and expect that Plymouth will have a greater exit velocity and momentum wrapping up this year. That will set us up for a strong 2025.

We're off to a good start on the acquisitions front with the Memphis portfolio we completed during the quarter. We have another portfolio under contract in Cincinnati that we're excited about. Our pursuit pipeline is over 11 million square feet and over $1 billion in size with nearly all of the opportunities located in our existing markets. We know these markets well, and we now have the capital to expand our scale.

I look forward to providing more updates over the next several months on how we're progressing with the leasing and capital deployment.

I would now like to turn it over to the operator for questions.

[Operator]

[Operator Instructions] The first question comes from Mitch Germain with Citizens JMP.

[Mitch Germain, analyst]

So Jeff, maybe just talk about some of the issues that arrived. I mean, I know you have them in your prepared comments, but I think last quarter, you mentioned an issue in Cleveland that was unanticipated, but it seems like now you have some other vacancies that were realized that, I guess, were they unanticipated or the lease was delayed. Can you just maybe describe a little bit more detail about those different situations?

[Jeffrey Witherell, executive]

Yes. Sure, Mitch. Jim Connolly is here. As you know, he's head of Asset Management. So he's got all the detail on that, so we'll let him walk you through it.

[James Connolly, executive]

So starting off with Cleveland, we had two issues in Cleveland, one at 2100 International Parkway where the tenant was up to date through Q2 on rent, but abruptly laid off all its employees informed us they couldn't pay rent. So we evicted them effective 9/30 and taken legal action against them, for whatever rent they owe us and in future rent. At the end of Q2, we were pretty far along with a half building user, but that they put that deal on hold. However, now we're really far along with a full building user that wants to take the building at the beginning of 2025. So I mean, we acted pretty quickly and got a tenant identified. We also have a backup tenant for that building should that deal not go through.

The other building in Cleveland is 1350 Moore Road. The tenant was current as of Q2. However, it became clear that, that business was not going to be viable going forward, and we started the eviction process. This all happened very quickly. The tenant left a bunch of equipment and inventory behind that had to be cleared out, which was -- cost us approximately $500,000 to clear up. We had a replacement tenant that was executed and is currently in dispute due to the prior tenant interference that we still need to resolve. We are pursuing legal action against the prior tenant and trying to rectify the situation with the new one. We are also pursuing new prospects that we have lined up for next year should our current lease not be rectified.

And that we do have a specific prospect in mind. I want to point out on vacancy that there's really -- it's not a bunch of new vacancy. There's St. Louis property that we've talked about all year, just went vacant in July. And there was the Chicago property that's been vacant which we'll be going to get into detail in about a second, but if you exclude those two, we only have -- it's 2.7% vacancy. So it's really just those two leases that drove the Q3 vacancy.

[Mitch Germain, analyst]

Okay. Thinking about some of these tenant issues, I know that it appears that they weren't exactly things that were on your watch list prior to identifying them. But are you spending a bit more time engaging with your clients to gain a better sense of their respective businesses to identify what other issues could arise?

[James Connolly, executive]

Yes. We're constantly doing that. In this case, I think we moved swiftly to eliminate a long protracted problem, and we're working with all our tenants.

[Jeffrey Witherell, executive]

Mitch, I think we've been on this for 7 years about this, right? We've built a vertically integrated platform. We manage about 75% of our own properties in-house. We engage with our tenants on a daily basis. This was something that came up very swift. It's not a portfolio-wide issue. And as Jim alluded to, we're backfilling these -- both of these spaces very quickly.

[Mitch Germain, analyst]

Okay. Jeff, anything you could share about the Cincinnati portfolio?

[Jeffrey Witherell, executive]

Yes. It is about $40 million. It's a multi-tenant. I think it's going to come in at a pretty good yield. I think we're going to like the yield on it, and it's got the growth that we're looking for, similar to Memphis. That's probably about it. I mean, we are under contract...

[Mitch Germain, analyst]

I was just saying is that going to close prior to year-end or you anticipate like right around?

[Jeffrey Witherell, executive]

I believe it will close before year-end.

[Mitch Germain, analyst]

Okay. And then maybe just provide some perspective on -- I think what you said about $1 billion pipeline, 11 million square feet, was that?

[Jeffrey Witherell, executive]

That is correct.

[Mitch Germain, analyst]

Yes. Can you -- anything there that -- is it one-off? Is it portfolios? And then to the extent, obviously, you've got about -- if we net out the $40 million purchase, you've got about like $450 million or so of dry powder from the recent transaction that's closing. So I mean, kind of what's -- is there potential to grow Sixth Street as well to maybe unlock some additional growth?

[Jeffrey Witherell, executive]

Yes to all that. It's certainly -- there's three portfolios in there. Again, I don't know where these go. I mean, we're actively negotiating, so we'll see.

One portfolio would be on balance sheet. We have another one that would work as a JV. And that's mostly a geographic concentration as well as if it's got a value-add component that we don't want to bring on balance sheet, the same reasons we've done JVs in the past, right? So we have that identified. There's a lot more one-off deals that are popping up in our markets.

And then just small portfolios, $15 million to $20 million portfolios. So it runs the gamut. Again, we look for some good starting yields, but we're also looking for growth. And so that's the mandate.

So we're pretty excited about our existing footprint. We've got some -- as I think you alluded to before, we have a couple of deals in Texas we're looking at. So that would be a market that we've always wanted to get into. We'll see how that plays out. So yes, I mean, Sixth Street is there with plenty of capital. It's really just putting the deals together.

[Operator]

The next question comes from Rich Anderson with Wedbush.

[Richard Anderson, analyst]

Maybe just to put a finer point on Mitch's question around Cleveland. You mentioned abruptly laid off employees in the case of 2100 and business not viable in the case of 1350. Maybe I don't know what those businesses were and maybe I don't want to know, but I'm curious as to what the learning event is from this in terms of just sort of monitoring credit, monitoring industries that you're exposed to and if there's anything that you take from this that you look throughout your portfolio and say, we've got to give something here or there a second look and make sure that we're protected. Any comment around that topic?

[James Connolly, executive]

Yes. I mean, obviously, both of these industries were fairly new industries. One was -- the one at 2100 was an online retailer that had some sort of new system that was going to improve everybody's online ordering, but it didn't really pan out. Everybody used different sources. And we kept them, I mean, they were in there for a couple of years, and they're always current on rent. And we had -- we made sure that all of our investment, our commissions and tenant improvements were paid back. We had a letter of credit that covered all that. So we didn't lose on that investment, we lost on the future part of it.

And the other tenant is refurbishing windmill furniture. So it's a business that is a viable plan, but it's just -- it's in its infancy. And they were current for a couple of years as well. So I would say moving forward, we would definitely not pursue these new type of transactions without a larger backing financial support.

[Richard Anderson, analyst]

Okay. I guess I never thought of sitting on a windmill, but I guess now I am thinking about. The second question is the marker on the Chicago cap rate with Sixth Street of 6.2%. That -- would you agree, not to be a cynic here, but would you agree that, that number was influenced by the fact that there was also the preferred and there was also the warrants, like in the absence of those other elements of the transaction, would that 6.2% really have been 6.2% or would have been something greater?

[Jeffrey Witherell, executive]

Well, Rich, this is Jeff. I think it's -- I mean, Sixth Street wouldn't have done one without the other, right? I mean I think this is a transformative transaction. They underwrote the entire company. They looked at -- they physically looked at over 75% of our assets. So they're backing Plymouth, if you will. But as far as the portfolio is concerned, and this is where I'll go back to this and continue to pound the table as I've done for the last 6 months, there have been a number of trades out there of like-kind properties to Plymouth portfolios of anywhere from 5 million square feet to 14 million square feet that have traded between 6 and 6.5 cap. That's the marker.

So again, we have 35 million square feet of property at a great basis, and we're going to get all this product leased as we always do. All of us in this room have been in the business for at least 20, 25 years. And I think when you cap our NOI next year, you're going to be right back into a great NAV calc based on those comps. I mean we're in the market every day looking at portfolios, and we're getting outbid because people are paying 6%, 6.25% caps for the stuff. So I stand by that.

[Anthony Saladino, executive]

And then, Rich, can I just -- Rich, one follow-up to Jim's commentary with respect to 1350 Moore. This tenant was on the watch list. We were working closely with them to potentially recapitalize their business. And as a contingency plan, we sourced, identified and fully negotiated with a new tenant at a 27% positive spread to expiring rents. That's the tenant that Jim mentioned with respect to the lease-up and now there is some legal contention, but ultimately, that will be sorted out here in the near future.

So I don't want the takeaway to be that we haven't been acutely focused on tenant health. We have been. These tenants, in particular, were closely watched. I think what we were surprised by was the velocity of change. But to Jim's point, we've moved quickly to vacate a tenant that wasn't going to pay rent, sourced, identified and prepared the space to accommodate a new tenant at a substantially improved rental rate.

[Richard Anderson, analyst]

Very good. And then last question for me. You mentioned NOI next year. I don't think you're going to give guidance, but there's a lot of movement here, right? You have Chicago, you have Cleveland, Memphis, the joint venture and St. Louis, of course. When you net all that up, is there growth next year from the company? Or do you think that you got to work some things out and sort of TBD that maybe the real number to look at would be the year following when everything is sort of addressed?

[Jeffrey Witherell, executive]

No. I do believe that there is significant growth ahead. We will -- I don't know if we'll get into it to ask this question, but like in St. Louis, we ran through a whole -- I think we ran through over 10 prospects. We now have another group of prospects in there. I mean I think if you look at the overall national vacancy rate, it's at 6.4%. The long-term average is 7%. All the brokerages are telling us that they feel that 2025, there's going to be an uptick.

Construction, I think we're delivering about 300 million square feet this year. That's the lowest since 2018. So there's still 96 million square feet of absorption so far year-to-date, probably going to break 100 million. So there's still good things happening in industrial. And if you go to Memphis, we have a lot of opportunity to mark-to-market. I think we did tell people, but I'll reiterate it that we started that out at an 8% yield. Over the next 2 to 3 years, that probably gets us to a 10% yield. I think the Cincinnati portfolio is going to provide similar metrics.

So I feel really confident that we get St. Louis leased up as we've mentioned, these two properties in Cleveland have prospects there that we're working on. So I feel really confident that we're going to get some pretty good growth next year.

[Richard Anderson, analyst]

I agree. It's just a matter of timing, right? You get something leased up, it doesn't necessarily cash flow immediately, is the main point that I'm thinking about. And just the cadence between '25 and '26.

[Jeffrey Witherell, executive]

Yes.

[Operator]

The next question comes from John Kim with BMO Capital Markets.

[John Kim, analyst]

On your Memphis acquisition, you mentioned Accredo Health is leaving some of their space by year-end. Was that known previously? Because I think in the last call, you mentioned the 70% tenant retention rate on the portfolio.

[Anthony Saladino, executive]

John, this is Anthony. Yes, that square footage was a known vacate. There's about 100,000 of that, that was previously a call center that we're converting back to more templated industrial space. We don't know if we're going to deliver two 50,000 square foot suites or 100,000 square foot building. We're going through the diligence on that as we speak. And then there's another 33,000 square feet, again, previously occupied by Accredo Health. It has a higher office finish. It's an office-like building. We're likely to divest that. In fact, that is currently under contract.

[John Kim, analyst]

Okay. And then Communication Test Design, they renewed or extended, which is what you had indicated. What are the chances that they extend past that year? And would that be at market rents? Or is there a prearranged renewal rate?

[James Connolly, executive]

There's not a prearranged rate. Obviously, it's a large space. So it would be at market or a slight discount to market because they're taking up a lot of space. But their contract, the reason why they wanted a 1-year deal was because their contract has a 1-year out on it with DIRECTV, I believe.

And as soon as that extension date goes by, they will extend. Now if for some reason, that contract didn't extend, there's two buildings there. It's not one building. They would always need one of the two buildings, so they would extend one of them, not the other one. So it's not likely that they're going to move out.

[John Kim, analyst]

In your prepared commentary, there was a mention of transitory vacancy, 487,000 square feet. Some of that was going to -- it sounds like a start into 2025. But then there was wording about executing leases on 70% of that space. So I'm not really sure if those two sentences tied to each other. I was wondering if you could just elaborate on that transitory vacancy.

[James Connolly, executive]

Yes. There were some leases that we expected to start in Q4 or start generating cash in Q4 that likely are going to start in 2025.

[Anthony Saladino, executive]

Yes. So the 70% reference, John, was for leases executed but not commenced. But we'll see contribution from 70% of that transitory vacancy in early Q1.

[John Kim, analyst]

So when you say executed, that means occupancy, not signing a lease?

[Anthony Saladino, executive]

No. Executed lease, they haven't taken occupancy nor has rent commenced as of yet. We have a lease agreement that is drafted and signed.

[John Kim, analyst]

And then on your pursuit pipeline, I think the first time you've used that wording of 11 million square feet. How much of that do you expect to eventually close?

[Jeffrey Witherell, executive]

That's a tough question, John. We really don't know. I mean we don't -- we're so volatile when it comes to acquisitions and capital that we can't say 10% closure rate. And if it's on the pipeline, it's really something that we could execute on, right? So this is not product in California or somewhere like that. This is a product that's in our markets. I don't have a great answer for you to say that, but I will say that, I mean, we're actively negotiating over $300 million of acquisitions as we sit here today with LOIs.

[Anthony Saladino, executive]

Yes, John, I think the way to look at that is that, that pursuit pipeline is a subset of the larger pipeline. And so there is a higher kind of confidence level around execution. But to Jeff's point, that's a difficult thing to specifically handicap.

[John Kim, analyst]

Yes. Because I mean, last quarter, it was less than 1 million square feet. Now it's 11 million. So it's a pretty big jump. So I'm just wondering if you widen the net...

[Jeffrey Witherell, executive]

Well, I mean we closed the 6-feet transaction, right, which you never know that's a deal like that is going to close until you get to the table and sign the docs, which we did. And so with that capital, we now can put LOIs out and stuff like that. So capital is always the question. If you have it, you can be aggressive. And if you don't, you can't be. So that's the catalyst. The Sixth Street capital is the catalyst for us to have a much bigger pipeline that's actionable, not just to talk about it.

[Operator]

The next question comes from Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

I wanted to ask about the NOI bridge or the FFO bridge that was provided in the prepared commentary, which was really helpful. And sort of going back to Rich's question about earnings or NOI growth going forward, maybe just to confirm around the fourth quarter, it looks like the $0.03 NOI shortfall, that's the piece that's not recurring. So your 4Q implied guidance is $0.48 at the midpoint, $0.47 at the lower bound. Is that right? And is that how we should think about the exit rate into 2025? Or when we think about some of the moving pieces around the Sixth Street transaction and other leasing and so forth, is there anything else that would weigh on FFO as we do think about sort of the run rate into '25?

[Anthony Saladino, executive]

No, I think your interpretation of the articulation of that bridge is accurate. I think Jim mentioned we did have some onetime impacts, the most meaningful of which was $500,000 cleanup fee essentially related to the tenancy at 1350 Moore.

[Todd Thomas, analyst]

Got it. So that includes now everything that's been announced, everything you know and then some of the lease-up, some of the commencements, and some of the capital deployment, all of that should build off of the fourth quarter FFO run rate?

[Anthony Saladino, executive]

Correct.

[Todd Thomas, analyst]

Okay. And then I just had a question about leasing in general and sort of the leasing pipeline and some of the discussions that you're having with tenants. We've heard about longer decision-making time frames. And I'm just curious to get your take with the election being behind us, does that improve leasing activity at all at the margin? Or is there still a bit of uncertainty or maybe more uncertainty and hesitation around maybe certain policies that might prohibit leasing activity from picking up a bit. What's your thought process there? What are you hearing?

[Jeffrey Witherell, executive]

So Jim will jump in here in a minute, Todd, but this is Jeff. I think we were together, what, 4 or 5 weeks ago. And after that, the velocity of leasing really slowed down, again, whether it's the election or whatever. But I think we were out 4 or 5 weeks ago talking to investors, and we actually felt a pickup in activity. But the last 3 or 4 weeks, there's been a -- was a real slowdown. Personally, I would think that is leading up to the election and possible rate cut today and so on and so forth.

Jim, do you want to add some color?

[James Connolly, executive]

Yes. Specifically on St. Louis, we had a couple of tenants that said they weren't going to make a decision until after the election. So hopefully, they get back to us in the very near future.

[Operator]

The next question comes from Brendan Lynch with Barclays.

[Brendan Lynch, analyst]

On the St. Louis asset, Jeff, you mentioned that you have about 10 prospects and now you have different prospects. Can you give any color on how that process is evolving and the new lease proposals?

[Jeffrey Witherell, executive]

Sure. Jim, St. Louis.

[James Connolly, executive]

Yes, sure. So a little recap of the St. Louis market. So there's approximately $3.8 million of space available in Edwardsville submarket and 7 buildings, including ours. There are four leasing transactions that are nearing completion that would effectively take half of the space off the market. These are deals for various reasons are not ideal for us. Pricing was low and there's some hazard issues that on what's being stored. So we're not expecting to close on these. However, we're still in the RFP process on those.

However, if we don't ultimately close on one of them and that will leave only three buildings with space over 325,000 square feet in the market. One of these is only 326,000 square feet. So there's only one -- we are one of two buildings that can afford a user over 500,000 square feet. So what I'm getting at is we're really the only game in the market, and our building is new and that other building is 30 years old. So with all this pickup in the market and activity, I'm really confident that we're going to land a prospect very soon.

[Brendan Lynch, analyst]

Okay. That's helpful. Some of your peers are also leaning more into occupancy over rate at present. Given the uptick in vacancy in the portfolio, can you talk about how you're trying to balance those two things as we go into 2025?

[James Connolly, executive]

So specifically on -- in Q2, our number -- our rent growth was a little lower and partially to do -- because we had two renewals in Indianapolis on large tenants that took up additional space. Because they took on additional space, the rent increase wasn't quite as high. So that drove it down from where we were at, normally like 18% down to like the 12% to 12.2% that you see. So really, we are factoring that into our deals. And in this case, we're working with tenants to expand and of course, give them a rate discount if they do.

[Operator]

The next question comes from Anthony Hau with Truist Securities.

[Anthony Hau, analyst]

Can you guys provide any progress update on the remaining lead space at Leti in St. Louis and the 16801 Exchange in Chicago? And what's the interest level for these spaces right now?

[James Connolly, executive]

Yes. We're really confident that the existing tenant is going to expand into either all of the 40,000 square feet left at Leti or at least half, probably by the end of the year. That's our time frame. And on Exchange, that building, there's been a lot of interest, but a deal hasn't come through. What we're doing is we've managed to get the taxes down quite a bit during the year through our appeal process, but we're also applying for a 6B status, which requires the building to be vacant for 1 year, which it will be at the end of this year. And that will get us an additional 60% savings on taxes and make the building much more attractive going forward.

[Anthony Hau, analyst]

Got you. And then for the St. Louis building, if you guys can't find an attractive deal, at what point do you decide to redevelop it into a multi-tenant building? And what would the incremental return be?

[James Connolly, executive]

Yes. So I mean, ideally, we want to not go beyond -- we really want two tenants in there, one or two. We don't really want to go beyond that. It's easily divided into two. You get into three, you're going to have to put in more offices. So that's our objective is to keep it to one or two at this point.

[Jeffrey Witherell, executive]

On that particular building?

[James Connolly, executive]

Yes.

[Jeffrey Witherell, executive]

Yes. I mean that's the case with every building, Anthony, right? This is Jeff. Some buildings are conducive to multi-tenant and some are not. So when you have 1 million square feet, you don't just break it up into 10 bays or something like that. I mean, how are your doors? How is it sprinklered? Where the wastewater? I mean all these things come into play. If you have to start jackhammering concrete floors to put in pipes, that cost a fortune. So we're on that. That's something we're a specialist at.

[Anthony Hau, analyst]

Okay. And just one last question for me. For the Cleveland spaces, are you guys expecting to receive rent payments through the eviction court?

[James Connolly, executive]

We haven't factored it in, but we are expecting to get some compensation.

[Anthony Hau, analyst]

And how much would that be? And would you guys like receive it like year-end or like in 2025?

[Anthony Saladino, executive]

I would not count on that, Anthony. Let us work the process. But from a modeling perspective and certainly from an accounting perspective, I would expect 0 return.

[Jeffrey Witherell, executive]

Yes. And we don't want to be talking on an open call, our legal strategy. All right. But we're on it. This isn't our first rodeo. All set?

[Operator]

This is the end of the question-and-answer session, and the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.