Q3 2019 Earnings Call
At that time, please limit yourself yourself to one question do you have a follow up please get back into queue. Also note that this conference is being recorded.
Let's turn the call over to Tracy Ward, Tricia and maybe Ken.
Thank you Michelle good morning, everyone. Welcome to trial I, just third quarter earnings if you've not yet downloaded the press release, it's available on our website at the largest dot com under Investor Relations.
Good morning, you'll hear from Tom Olinger, our Chief Financial Officer, and also joining us for the college.
Gary Anderson, Chris Katyn, Mike Curless, not great clean Mcewen and gene Reilly.
Before we begin our prepared remarks I'd like to state that this conference call will contain forward looking statements under federal Securities laws.
These statements are based on current expectations estimates and projections about the market and the industry in which the company operates as well as the beliefs and assumptions.
I've management.
These factors are referred to until I, just the 10-K RFP filings.
Additional factors that could cause actual results could differ materially include but are not limited to the expected timing and likelihood of the completion of the transaction with diabetes, including their ability to obtain the requisite approvals are stockholders and the risk that condition. The closing of the transaction may not be satisfied.
Forward looking statements are not guarantees are performing an actual operating results may differ.
Finally, this call will contain financial measures such as though even to other non-GAAP measures and in accordance with Reg G. We've provided a reconciliation to those measures in our earnings package.
That I'll turn the call over to Tom and family. Please again.
Thanks, Tracy good morning, everyone. Thank you for joining our call today.
We had another outstanding quarter customer sentiment remains positive and we see no meaningful impact on our business from uncertainties surrounding trade.
Our proprietary operating metrics reflect healthy demand showing deal gestation conversion rates are positive and inline with last quarter as our customers improve their supply chains in response to consumer demand for ever faster delivery times.
You want market fundamentals are strong.
I'd like to share our assessment of third quarter market statistics, as we've seen more divergent viewpoints the normal.
We see historically low vacancy in the mid fours.
With supply and demand balanced at 75 million square feet huge rents have outperformed and as a result, we're raising our 2019 U.S. rent growth forecast from 6% to 7% waiting to an 80 basis point increase in our global rent forecast to six and a half or side.
Activity across Europe remains healthy in the UK, while overall demand is solid and or build to suit pipeline is very active we are highlighting the midland as a supplier risk.
We continue to forecast 2019 rent growth on the continent to be the highest in more than a decade.
Fundamentals in Japan, or improving with vacancy in Tokyo at less than 3% and Osaka at less than 6% the lowest points in five years.
From an operating standpoint, you will see that our quarterly results reflect our strategy are prioritizing rents over occupancy to maximize long term lease economics.
We leased 38 million square feet, including nearly 6 million square feet in our development portfolio.
Quarter end occupancy was 96.5% down 30 basis points sequentially and remains above our five year average.
Rent change on role for the quarter hit an all time high of 37% led by the U.S. at 41.7%.
Our share of cash same store NOI growth was 4.3% for the quarter, which was impacted by 60 basis point reduction in average occupancy again, consistent with our strategy to push rents.
Globally are in place to market rent spread widened by 40 basis points in a quarter and it's now almost 15.5%.
Our over $400 million in nominal terms.
Core AFFO was 97 cents per share for the third quarter, which included 18 cents of that promote income from our pulse venture to promote came in above our forecast as your valuations increased more than 2% in the third quarter.
For deployment starts in the quarter were $577 million with an estimated margin of 22% and included about two thirds build to suits. The pace of starts will increase significantly in the fourth quarter.
Stabilizations were $658 million with an estimate in March and a 37% and value creation of over $242 million.
We continue to access capital globally at very attractive terms during the quarter, we issued $2.8 billion of debt primarily in euro at a weighted average fixed interest rate of under 1% in a weighted average term of more than 14 years, it's worth pointing out that we have an annual need for incremental six.
Hundred million dollars of non dollar debt to naturally hedge our growing international assets.
These issuances lowered our total weighted average interest rate by 10 basis points to 2.4% and lengthened our weighted average maturity by about two years to just under eight years.
We continue to maintain significant investment capacity on the balance sheet with $11.7 billion of liquidity and potential fun sell Downs. In addition, there was an incremental $5.4 billion of existing third party investment capacity in our ventures today.
Guidance for 2020, which I know many of you are looking for will be provided at our upcoming Investor Forum on November 5th.
For 2019 guidance I'll cover the highlights and on our share basis and note. This guidance does not include the positive impact.
I P T acquisition.
We're increasing the bottom end of our cash same store NOI guidance by 25 basis points and now expect a range of 4.75% to 5%.
We are raising the midpoint for development starts by $250 million and now expect starts to range between 2.2 and $2.5 billion.
Build to suits will comprise more than 40% of total starch, which is above our initial expectations.
We are projecting $650 million that deployment uses which we plan to fund with free cash flow and debt.
Let it promote income for the full year is now expected to be 18 cents per share an increase of two cents from our prior guidance.
For the full year, we're increasing our 2019 core FFO guidance midpoint by three cents and narrowing the range to between $3.30 and $3.32 per share at our revised mid point growth in core AFFO per share. Excluding promotes is 10% higher than last year over the past five years, our growth has clearly been.
Optional with a CAGR of almost 12% while de levering from 27% to 18%.
As I mentioned this guidance excludes the acquisition of IP tea, which we expect to close in January of 2020.
We plan to split the 4 billion dollar portfolio equally between our two U.S. vehicles.
Private capital Investor interest continues to be robust as evidenced by the record fund raising at our ventures in the third quarter.
Our pro rata investment will be approximately $1.3 billion, which we will find what cash and debt.
We continue to expect the annual core FFO accretion from IP to range between five and six cents per share or roughly 2% on a stabilized basis.
The acquisition of this high quality portfolio will capture significant revenue and cost synergies and deliver shareholder value on day one.
To sum up the third quarter was a continuation of what has already been an excellent year I feel great about our outlook for the rest of the year and beyond and with that I'll turn it to the shelf for your questions.
At this time anybody would like ask a question. Please press star one on your telephone keypad again that must be star one on your telephone please.
Keypad. Thank you.
Your first question comes from Craig Melman, <unk> from Keybanc capital markets. Your line is open.
Hey, guys, maybe just wanted to hit here on demand and kind of where do you guys have the availability in the portfolio could you guys just kind of talk through what you're seeing in the demand profiles between kind of larger and smaller tenants.
And your ability to push rents there and maybe improved credit quality and then kinda talk a little bit about.
What you guys see as your ability to push.
The occupancy in the you know under 100000 or under 250000 square foot space, where you have more opportunity and maybe talk is there any more frictional vacancy in those type of spaces than in your bigger box or could we see those kind of space is kind of narrowed or where your your average occupancy could be.
No that's not that much I know.
Did that everybody write down on anybody right.
[laughter].
Well, let me take take a.
Stab at this first maybe talking about the smaller spaces. So.
These are spaces, where we can push rents.
And we're seeing pretty broad based demand frankly across all all sectors.
But I think those of the smaller segment is where we can.
Which rent growth and I think if you look inside.
Rent change numbers, which are obviously.
At all time highs.
That would that would be the highest in terms of Ah.
The composition of the demand from from an industry perspective, again, that's pretty broad based obviously I'd always week.
Almost no matter, where you are in the globe, but otherwise we're still seeing pretty broad based growth, we're seeing continued growth.
From the e-commerce sector, and that's probably a combination of reconfiguration of supply chain as well as a net demand.
So thats a start on it.
Craig This is Tom so to your questions one on credit quality, our credit quality continues to be exceptional are our bad debt experience has been below 20% or 20 basis points of rent below 20 basis points of rent for the last six years continues.
This this quarter, so I feel great about our credit quality.
Then just regarding your question on small spaces and frictional vacancy we do have a.
Many more units in our smaller spaces. So naturally there is going to be more churn in that particularly as Jim pointed out we're pushing rents. So you can see a higher a little higher frictional vacancy, but the payoff.
Much higher rents so the economics are clear.
To keep pushing rents.
Your next question will come from Jeremy Metz from BMO. Your line is open.
Hey, good morning.
I need Fedex on its earnings call last month.
They had a day reciting more challenges ahead in 2020, they talked about the typical the global trade disputes in concerns over economic slowing having created significant uncertainties.
In your opening remarks, Tom did mentioned that yes, sorry that the yen started to see that in your customer behavior, yet clearly those richer out there. So just wondering has that surprised you at all that you really haven't seen and in the customer behavior, yet and then maybe just any broader thoughts on all this all in tax your outlook for development starts beyond.
On the call. It 2.3 billion you have underway in terms of cadence or desire to take on spec et cetera. Thanks.
Sure I think both statements can be can be true at the same time Fedex cares more about flows and obviously those become very volatile when it's a trade wars, one day and no trade wars. The next day.
And they have a very sick.
Cost bases infrastructure, you know planes and trucks and all that so.
Erratic volume cannot be good for them because they either missed the peaks or can't handle either they can't handle the peaks or or have too much capacity put your trust.
We're in the stock business, so actually uncertainty in the short term.
He is extra demand for space, because when you don't know when that next.
Good is going to get to you because the tariffs are and what cost you kind of carry more inventory I'm more stock closer to the customers. So I think fedexs right as far as the metrics for their business our concern than I think the metrics for our business are just different.
Your next question will come from Derrick Johnson from Deutsche Bank. Your line is open.
Thank you hi, everyone can you discuss the leasing process for the multistory facility in Seattle, where Amazon and target ultimately signed and how competitive was this bidding process. How many interested parties you have and where did rents shakeout versus underwriting and what type of future demand.
We anticipate thank you.
I would say the rents and the economics turned out a battery than our expectations. It took a little bit longer to lease up but at least stop at higher rents and the reason that took a bit longer term lease up is that nobody ever seen a multi storey building before so they want it.
Two.
Look at it lay out a lot of different configurations, I make sure they could get the efficiencies out of it.
We couldn't be more pleased with the quality of the tenants or the financial performance of the asset with respect to its implications.
I you know for some reason this building has gotten a lot of attention.
And people think that there is a.
Multi storey strategy. There is no multistory strategy. This strategy is to provide space that places, where our customers one of which is increasingly close to their us ultimate customers. The solution in some places its multistory and in other places is single story. So we're not in the business of building. So many.
Multi storey buildings were in the business of growing or infill position.
Your next question will come from Vikram Malhotra from Morgan Stanley . Your line is open.
Thanks for taking the question. So Blackstone just sold as part of their original GLP acquisition wondering if you looked at that portfolio and if you can just more broadly given any sense of.
Any any I mean, the portfolios across regions and sort of how pricing all cap rates are shaking out.
[noise] Vikram you can assume that we look at everything people know our phone number and they know where what business, whereas so.
Absolutely positively have never thought of a material transaction that we have.
So you can assume we look at everything I think the implications are you gonna have to ask Blackstone, but.
You know, obviously, they but but that portfolio and presumably they paid a pretty good price to get it and presumably they sold it to these guys too much that presumably pay that really good price to get it that was attractive enough for blackstone to sell it so.
I can't I can be any more specific than that because I'm not in blackstone's.
This is you making rooms, but up but those would be those assumptions would be probably pretty fair.
Your next question comes from Jamie Feldman Bank of America Merrill Lynch. Your line is open.
Thank you I want to get your has more of your thoughts on just the supply outlook. I mean, we do have five historically high supply coming on line, but you just said your development starts were 63% pre leased in the quarter and you want to start more.
You expect to pick up in the fourth quarter. So can you kind of paint the big picture of how we should be thinking about the supply risk heading into 20 and as you think about your.
Do you development opportunities the pre leased percentage and what gives you comfort at these this level of volume.
Hey, Jim you hear me here I think theres a lot of confusion about supply numbers people mix supply, which is an annual concept with whats under construction, which is a snapshot that that given point in time. So let me have Chris to take you through those numbers because they're materially different.
As construction duration has linked yeah, absolutely Jamie let's talk about three concepts first completions completions actually are appears to be down this year by about 8%.
When we look at a more real time indicator like starts starts are flat. This year now to me mention duration to build projects has gone up and so we've seen under construction right that time to deliver product has gone up by about a third in this cycle for all the challenges around supply that we previously discussed and so.
Deliveries out about pipeline now are much less than kind of one or 100% in a given following four quarters. So you got to you Gotta look at the time to deliver product to understand what deliveries in the following.
Orders. So basically if you had the same level of supply.
Same level of property under construction you would have two thirds the annual supply if that trends of the recent past continue so those two concepts needs to be really kept apart.
Your next question comes from Blaine Heck from Wells Fargo. Your line is open.
Hi, Thanks, I meet in the press release, you pointed out the exceptional interests that you're seeing for your strategic capital ventures, and you guys have obviously done a great job raising money on that side of the business can you just talk about whether there are any specific groups that you are seeing incremental interest from and then on the flip side, what do you think could cause that.
Investor interest to decrease I guess is there anything that kind of sticks out to you as a threat to that capital source in particular.
Yes, the surgeons are pretty much from everywhere I would say they use pension funds are probably a flat to down compared to their you know call. It 10 near a type numbers.
But Japan is up significantly generally Asia is up significantly as these large institutions and sort of the pension system gets a gets active an alternative investments.
So it's everywhere on the margin I would say U.S., it a little less and Asia, a little bit more.
With respect to the threats to that it's the same old threat that we've seen in every cycle, it's the denominator effect.
If these guys are generally at todays a investment levels under allocated to real estate.
And alternatives generally and really under allocated to industrial because it's a tough property type to access, but if the stock market goes down and the bond market goes down and the rest of the portfolio goes down the same percentage allocation to real estate, we'll have to go down and that's usually been.
The cause of reductions in in capital flows.
Can I ask.
Your next question is from Ki bin Kim from Suntrust. Your line is open.
Thanks, Good morning out there just two questions.
I mean, what's your view on the potential impact from grocery ecommerce onto were health business and how PLD, what potentially a pay apart.
Second definitely spreads obviously had some really good numbers anything interesting about the mix of what wrote this quarter that might be different going forward.
Yeah, I lead times through the second part I think there are three things that drive the share of ecommerce in our portfolio.
For the space devoted to it number one is penetration increasing penetration of e-commerce as a percentage of total.
Total sales retail sales that number is going up every year.
And I think will go up for the foreseeable future as more categories become e-commerce .
Friendly and as you know the millennials I guess are not millennial generation Z ours, who grew up with the with an iPhone start entering their prime shopping years. So you know the I phone I think it's 11 years old and.
And.
12 year olds, who are now graduating from college or 11 sort graduating from college basically have never known at world without an iPhone and ecommerce thing is as those guys entered the population.
Pending part of the population I think.
Centers will go up.
And then there's the old three it factor of space that E Commerce thinks would show.
On top of the gaining share of e-commerce , and underlying retail growth, which is probably the slowest something to three factors, maybe 2% type thing, although three factors to mine should make for a really good environment for e-commerce demands overtime.
No.
I don't quit their real strategic question is how does automation effect.
The three X factor.
It does reduce it does an expanded.
The answer on that is unclear at the moment and in certain instances increases.
The need for real estate and in certain cases, it reduces the need for real estate. The one area that for sure overtime will get a more efficient is the returns business and you know returns.
Our or really caused by free shipping and free returns and all that sort of thing and overtime.
I think fit and issues like that will get better so.
So I would guess that part of that demand in warehouse space will will go down.
Anyway that the biggest biggest strategic driver of all this long term secular driver. All this is the need for speed and choice because the more choices you want and the quicker you want them to more inventory you need to position on near the customers. So that's all really good for us.
Given this is Tom on your question about rent change for the quarter, we did see.
Higher mix this quarter.
In the West and East region. So the coastal markets. The U.S. that being said almost every region had its all time high or near its all time high and rent change. So we're seeing very positive rent change across the board almost without exception you asked about a trend our four quarter trailing average rent.
Changes is right at 28%.
This quarter I think thats, a pretty good outlook in the near term for where rent change should be but remember when we talk about in place to market at being.
Team and a half percent below market that means.
Rents need to grow 18.3% to get to market right. So if your 15%, 15% under rapid you need to grow by 18.3%. That's just math to get to market rents. So think about our in place.
Bilton.
Rent change it being 18.3% and thinking about what's rolling near term is obviously sign.
Further ago, so naturally our rent change would be higher in the near term.
Lastly, I'd point out as rent change the rent change on all that four quarter averaged four now 28% that's up 600 basis points in the last year. So we've seen that number move up.
Meaningfully and I think we can hang around there based on our in place to market.
Your next question comes from Eric Frankel from Green Street Advisors. Your line is open.
Thank you just two quick questions ones related to a portfolio sale just based on the black affirmation Blackstone activity do you see any meaningful differences between portfolio sale prices versus smaller transactions you guys might pursue and then second just on the demand front, obviously, there's a lot of press kind of given to smaller buildings.
And multi tenant leasing.
My conclusion is that it said that that kind of leasing and the and the rent. The ranked whether you can get it's really more dependent on location than property size can you afford whether that's true or not or is a smaller building in some midwest market getting record rent growth as well. Thank you.
Eric Let me jump in the middle that before before gene starts on the first part did the.
The most important thing with respect to rent growth is a location in terms of macro market and the micro submarket by far more important than 10 sites and all that stuff, we talked about before so you're spot on that one and those are the scarcest.
Properties gene you want to answer yes, Eric with respect to the portfolios I mean, we as I made mention of course, we look at all these things we price and for sure lately portfolios are selling at a what will you consider a premium to the some of the part so I think that.
That is true having said that you know there's also plenty of one off.
Transaction and very very good morning.
Pretty stunning.
Metrics associated.
Your next question comes from Caitlin Burrows from Goldman Sachs. Your line is open.
Hi, there I was just wondering maybe on the development side. The total development portfolio declined slightly since last quarter, but the 2019 starts are actually up. So this is this just a function of pulling forward previously expected activity and what's your confidence in being able to sustain that level of starts going.
Going forward as Prologis growth and then just on the yield side does have come in a little I think from about 6.5% to six one so what's driving this and could that increase back up.
Yes in the second point, that's really basically mix.
Having said that you have generally seen cap rates declining.
Frankly over the last well.
Probably for 20 years.
In the last couple of years cap rates have been.
Declining and you will see some change in the returns on cost as well in terms of the development volumes. You know, we're implying is a big fourth quarter about 1 billion too, but I think thats about right on top of what we did in the fourth quarter last year.
We're highly confident that and in terms of the future beyond that.
Talk about that.
When we give guidance in the future. Yes. This reminds me of a previous question though.
I answered, which is what's our attitude towards spec development and I would say, though the bar on spec development.
Has been high and continues to be pretty high and.
You can see the results of that in the build to suit the percentage being you want higher.
Your next question comes from Manny Korchman from Citi. Your line is open.
Hey, good morning, everyone.
Tom just thinking about your yearend occupancy guidance your retention in the quarter was actually higher than the feeling few.
And yet you commented in the press release that you're focusing on growth versus occupancy.
So does that mean that new leases aren't happening as fast as you thought is that because the rent levels was there something else that's.
No connecting between retention rates.
So this is not Tom but I'll answer your question.
Oh, the retention ratio, you're dealing with tenants that R&D in this space and today labor is a huge issue for people and every time they move.
They have to go higher bunch people, because now the workers have choice and and they're not going to change their commuting patterns et cetera et cetera. So customers that are in existing space has a high much higher propensity to stay regardless of almost rent, which is an afterthought for lot of so where you see the effect the primary effect of.
Of pushing rents is on capture of new leasing in the developments, that's where are you likely to see a demos and that of course doesn't affect the retention numbers that we report.
Your next question will come from Nick Yulico from Scotiabank. Your line is open.
Thanks, I said question on the on the leasing spreads I know you time, you gave some menthol and on what drove it higher this quarter just want to make sure as well though that.
The switch to the clear leases.
In the past year is that had any impact on the way you guys measure the releasing spreads.
No impact at all.
Your next question will come from Michael Carroll RBC.
RBC capital markets. Your line is open.
Yeah I just wanted to follow up on the I guess kill you stand fun pushing rents over occupancy Havent does hasn't just been your stance over the past two years or you just being more aggressive today.
That's a good fair way to say is what's being reflected the lease spreads and how they're pretty much double than what they were up for the trailing four quarters.
[noise], it's been I stated objective to do this for previous quarters, but they are these messy things called human beings and people in the field that that have been need to change their mindset and that took a couple of years to really get that gone. We track why we lose tenants when we don't renew somebody.
We track them for a long long time, and I'm not getting you, but they were years that we had literally zero tenants, leaving because rents on renewals literally so that number is no longer zero.
But it's still lower than I think it should be or I would have expected it to be.
Your next question comes from Steve Sakwa from Evercore. Your line is open.
Thanks, I mean, I just wanted to clarify when you talked about the new and Chris talked about sort of the construction pipeline or time to build getting longer. It was at nine months to 12 months, where is that more of a 12 month to now 16 month, just trying to understand.
That and then are there any markets in the U.S. you didn't really call anything out, but just trying to get a sense or their markets in the U.S.. So you're a bit more worried about are really just seeing much less rent growth today.
Yes, Jeff by the way the on the duration of construction it depends on where a in Japan. They will be they were 16 months I don't know what they are today, but takes longer to build a multi storey building, but let's focus just on a single storey U.S. style warehouse and Chris as the numbers for you.
Hey, Steven is going from eight to nine months to something more than a year or call. It a call. It 13 14 months, what I think we will see is that deliveries over the next four quarters can be roughly 75% of the under construction pipeline. That's how we see the numbers coming together as it relates to.
Markets, we talked about how we are on the last call. How we haven't added any markets to our supply risk.
With that remains the case today and in fact marketing like Chicago comes off that list this quarter and on track on came off a little bit earlier. So Osaka is a market that came off and then on that list include Atlanta.
Pennsylvania, Houston, Spain, and the Midlands was covered and.
And.
Homes script, I would say the one that I would point out as being more at risk today than last quarter, even though it was on the list as Houston.
There is a lot of space under construction in Houston, and and I think some people are going to get surprised.
Now and some of it it's not in the in the best Submarkets. So so some of the outline submarkets in Houston, you need to do you need to watch Fortunately, we're not exposed to those submarkets.
Next question will come from John Guinee from Stifel. Your line is open.
Great I think Mike Curless is in the room I was just looking at page 24, and I noticed a an uptick in a pretty sizable land acquisition year to date and also.
Acquisitions and other investments in real estate can you walk through a Mike go where you are buying the dirt and also what the other investments in real estate might be.
Probably gene should answer that question since Mike has a new job, but but gene go ahead and make it maybe.
Customer color, where they want to there but.
John or where we generally need to replace there isn't the coastal markets, where we've done a lot of development absorbs a lot of the land bank. So there's a there's a piece a in L.A., including that but as as we look oh going forward on replacing land is very very expensive. These.
Yes.
As you know we've done a lot of work to work this land back down to a what we considered a manageable level.
As we as we replace land going forward, we're trying to do a creatively we're trying to tie Atlanta options.
But it's going to be more expensive and we'll see the.
The land bank pick up a little bit, but we're going to remain very disciplined on that front as Deb our biggest needs for land I would say our southern Cal were good in Seattle, Good in the Bay area, Southern California, we need more land.
Chicago, we need more land.
And I would say new Jersey, we need more land for sure those are the top three than I would call and with respect to the customers where they want to be two three years ago, 80% of our land that we're doing build to suits and we're worried mobile markets. Those numbers are closer to 95%. These days.
And John your question about the the other investments just thinking about those has been covered land place.
No not plan, but will become yes lands soon.
Yes, those are doses are actually yielding probably pretty close the local market cap rate, maybe a tad below maybe 2025 basis points below but they're basically.
Currently in place.
Your next question comes from Michael Mueller from JP Morgan Your line is open.
Yes, Hi, I was wondering do you expect the elevated mix build to suits to be a little bit more the norm over the next year. So.
As a micro as we did have a robust quarter at almost two thirds build to suits. If you look across the year blending in the high Thirtys and I'd expect.
You know numbers than to be in the low fortys as we look forward I think this was an unusually high quarter, but directionally indicative of how important it obviously part of the businesses to us These days.
You know compared to five or 10 years ago, or 15 years ago. I mean that number would have been 2020, 5%. So I think the tightness in the markets is forcing the build to suit percentage up.
Your next question will come from Craig Craig Mailman from Keybanc capital markets. Your line is open.
Hey, guys just wanted to kind of.
Hit on some of the your liquidity here in the funds and on balance sheet.
Cost of capital is clearly advantageous, but you have a lot to kind of well heeled competitors as well I'm just kind of curious you guys look at the acquisition landscape you've been successful and some miss some others, but just kind of how you look at return requirements for on balance sheet acquisitions here versus the in funds and just talk.
A little about what you're seeing on the quality spectrum of portfolios of traders or or may be out there and kind of interest level.
Let me, let me start that and gene jump in if you'd like I think that quality the pricing for quality different differences.
Is getting compressed in other words cap rates for lower quality lower growth assets are compressing against high quality assets on location and that always happens.
In this part of the cycle people are really anxious to get into this.
Asset class and.
If it's industrialists industrial and they become less discriminating overtime also if you're a leveraged buyer to the end you're really looking at locking in the cost of capital that's capital today and you employ a lot of it.
Obviously this are really good environment for your.
Buying things and financing them with respect to the way, we look at or a unleveraged wacko large cost of capital I would say, we'd look at that every quarter or so and Lee.
Asia locally and only they're very limited way have dropped our requirements I would say for a U.S. high quality portfolio.
Probably a six I our would be the right number today very high quality portfolio for us and ER and.
You know ticket up from there, but unfortunately, some stuff in the marketplace even for local at the assets is getting price.
Tighter than that now a six I or are in a 1.6 or 7% 10 year environment.
Is pretty attractive and those are some of the wider spreads as seen in my career and so so yeah. It's an absolute numbers a sound the low but would in relation to cost capital or debt capital there actually pretty attractive.
Your next question comes from Vikram.
Well I Trust and Morgan Stanley Your line is open.
Thanks, just wanted to follow up on two things one for Chris you mentioned sort of.
Some of the rent growth and obviously, it's different by Submarket I'm wondering.
If you're starting to see at any divergence from recent trends.
We then in Submarkets within them essays, meaning for divergence and what you've seen recently.
And then just one for Tom on the clearly there is wondering how that's a if any impact on the expense side and if it may be.
Positively or negatively impacting I know I growth.
Yeah, Hey, as it relates to rent growth a couple of waste looked at that one is we continue to see that divergence between infill and on infill as Hamid was discussing earlier in terms of Submarket strategy as it relates to markets, we've seen better outperformance in the east I knew you.
Youre can in Toronto for example, and we continue to see really good growth in Europe , much like we telegraphed last year in the year before.
What you see there is some of the early recovery markets continuing to outperform other that's Germany, or the Netherlands, or Czech Republic, and some late recovery markets really starting to pop France comes to mind.
That's how the rents are trending.
Great Vikram on your question around the clearly some expenses.
Those leases are set up where we we fix all the costs, but real estate taxes attendant bears that and we are collecting slightly more.
On the expense reimbursements right now.
But essentially quality that so we've set it up that way.
To be expense neutral so no impact on in Hawaii and they go back to next question Justin that clearly some does that have any impact on how we're calculating rent change. It does not that clearly, it's just thinking about it simply having a rent component and that expense reimbursement component and the rent change as calculated on the revenue the rent component not the expense.
So knowing that I.
I just wanted to clarify something comps that we actually don't collect reimbursements, that's why to queries, but we do track what it would have been under a triple net lease.
And actually for the last a year and a half were to that we've been implementing this the numbers have been remarkably on top of one another and that's the advantage of having I don't know and the 800 million square foot portfolio to spread the just stuff around.
Your next question.
Welcome from Manny Korchman from Citi. Your line is open.
Yeah. So Hamid I had a follow up on my and my previous question that I have a new one for you guys but.
So you mentioned, you know leasing or developments I guess that wouldn't impact your.
Occupancy guidance, so just going back to that in isolation that retention is where you expected to be at 81%.
And you've lowered your occupancy guidance that means that your pace of lease up.
In already vacated space or space to be vacated this might be slower.
Is that the wrong way through.
We are pushing remember the part that I said that we in the years, we had zero people that we were losing as part of their renewal discussion that number is not zero, but it's not as high as I would like it to be you're also talking about occupancy declines from 98% and I've been.
On this for 37 years, there was only one near where we were into 98% range and I said guys don't get used to this we're going to push this number down. So I think we were very clear on what our strategy was and I would say we've executed exactly the way we described.
Your next question comes from Jamie Feldman from Bank of America Merrill Lynch. Your line is open.
Thanks, I was just hoping you could explain more why development, you're taking so much longer to deliver.
And then also I'm just thinking about the T.I. number in the quarter and what we've seen this year I mean are you spending more on leases.
Hi, guys on leases and if so can you explain what does why that's happening what that's going to and is that impacting your ability to push rents as well.
Jamie I'll take the first one it's gene it's basically a combination of construction timeframe and there's some entitlement.
Timeframe in that as well and which by the way can affect their projects through its construction.
As you pull secondary permits as you go forward. So it's really those two items and of course, depending on where you are geographically theirs.
Pretty wide range of outcomes. We've also had kind of weird weather patterns.
You know that I think most of you I've noticed that definitely messes with constructions good.
Jim in your second question on the the turnover costs.
I'd say.
It's a little higher this quarter I think it's due to two things its next and timing, but I'd go back and looked at what are what we've been on a trailing four quarter I think thats about a representation, we have been coming down.
Pretty clearly over the last on a trailing four quarter basis over the last really three years and that makes sense, just given concessions are or falling across the board. The other thing I'd point to is look at free rent as a percent of lease value that is.
Can.
Consistently declining again, so I think overall this quarter's mix and a little bit of timing.
It's not impacting our we're not trying to buy rent change that's the question.
Your next question comes from Steve Sakwa.
Our core your line is open.
Thanks, Amit I was just wondering if you could provide an update on sort of the big data initiatives and the procurement and sort of where you stand and you know is that something we're likely to get a lot more detail on for 2020.
On the Big data, we are as I mentioned to tackling one very specific project, which is yield management and I would say.
Thats going really well, we're piloting in foreign markets and we'll be expanding that to the portfolio and we're encouraged by the early results I don't know Chris may have more to stay about where you want to talk about the other initiatives on the procurement initiatives. We stood at procurement initial organizations, we've talked about in the past and things are going well there I'd say both in terms of.
Procuring.
Construction related items, and Capex and GNS, so that is off and running and with respect to the revenue side of the equation I'd say that we're off to a good start.
We're starting to build that business, where probably getting into the tens of millions of dollars in terms of revenue. So it is becoming more meaningful and we're seeing roughly double double digit growth.
Yes, I would say that that business today.
If you isolate it would be pennies a share of incremental earnings I think in two to three years. It will be dimes, and we're hoping that its potential is more than a dollar.
So but that is going to take us a while to get too. So don't don't put in the dollars, but it does.
But in a couple of pennies that we're talking about right now we're doing better than that actually.
But but it's a it's a slow ramp nobody's done this before so we need to educate ourselves and our customers and a lot of other people to get that.
I think Steve you weren't there last person. So thank you all for your interest in the company.
I want to put in a big plug for our analyst day, which is coming up and that's why we saved all the good guidance for that they do encourage you to comp take care.
Thank you everyone. This will conclude today's conference call you may now disconnect.
Yeah.