Q4 2019 Earnings Call
Well again be placed at home. Thank you for your patience.
The profile just Q4 earnings conference call. My name is Julien and I'll be your operator for today's call.
At this time, all participants are in listen only mode.
It or we will conduct a question answer session.
Asked the question you only to press star followed by the number one.
Also note that this conference is being recorded.
I'd now like to turn the call over to Tracy Ward Tracey you may begin.
Thanks, Julie and good morning, everyone welcome to our fourth quarter 2019 conference call. The supplemental document as available on our IR website until watches dot com.
I'd like to state that this conference call will contain forward looking statements under federal Securities laws. These statements are based on current expectation.
Nice intersections about the markets and the industry in which per lot just operates as well as management's beliefs and assumptions forward looking statements are not guarantees a performance and actual operating results maybe affected by a variety of factors.
Most of those factors. Please refer to the forward looking statement notice in our 10-K or Sep filing.
Additionally, our fourth quarter results press release, and supplemental do contain financial measures such as though and EBITDA that are non-GAAP measures and in accordance with Reg G.. We have provided a reconciliation to those measures.
Super 27th we announced the merger between per like Us and Liberty property Trust.
Materials regarding the transaction are posted on the company's website and are available on the Fccs website. This includes the joint proxy statement containing detailed information about the transaction.
Oh, we'll focus on our fourth quarter and full year results as well as our 2020 outlook. The company will not provide comments related to this transaction beyond what is included in our prepared remarks.
This morning, we'll hear from Tom Olinger, our CFO , who will cover guidance.
Also in the company's outlook and also with US today, Fortunately its call our Hamid Moghadam, Gary Anderson, Coruscating, Mike Curless clean Mcewen Nekritz gene Reilly.
I will turn call over to Tom will get started.
You Tracy good morning, everyone and thank you for joining our call today, the fourth quarter close out another excellent year.
Sure. If AFFO was 84 cents per share ordered $3.31 for sure for the year before.
Before your includes a record for net promoter 18 cents per share.
Core FFO, excluding promotes grew 10% for the year.
And with more than 2% above our initial guidance.
As we enter 2020 market conditions are very good and we've seen no meaningful impact on our business from trade a retailer bankruptcies.
Why chains are increasingly mission critical to our customers businesses, which is generating demand as they undergo structural changes to deliver high service levels.
We see increase requirements across markets and product categories as more customers seek to strengthen their fulfillment capabilities.
Proprietary customer metrics reflect healthy activity showing steel gestational conversion rates are consistent with the third quarter.
You watch market fundamentals remain excellent.
I'd like to share per why this is assessment of supply and demand as data providers use a variety of methodologies, resulting in a range of us.
Completions in 2019 work 275 million square feet flat compared with 2018 higher replacement cost land scarcity, the elongated permitting remain governors to supply.
Net absorption was 240 million square feet, but limited by historic low market vacancy, which ended the year at 4.6%.
10 basis points from last quarter, and 20 basis points from last year.
Market rents in our U.S. portfolio increased by 8% in 2019.
We have no new additions to our watch list this quarter, but here are some color on two markets that remain on the list in Houston, while demand is strong vacancy a 6.7% and expected to remain elevated which will constrain near term rent growth, we have low wall in the IP Gi and LPTA Houston portfolios.
In 2020.
Our near term outlook for Pennsylvania is more positive specifically core Lehigh Valley, where demand has accelerated the supply pipeline has decreased and vacancy declined 140 basis points to 3.2%.
At year end.
In Europe activity remains healthy rent growth on the continent in 2019 was more than 6% the highest on record.
Fundamentals in Japan continued to improve with vacancy in Tokyo, and Osaka at their lowest points in five years and rent growth is accelerating.
Turning to operations for the quarter, we leased nearly 38 million square feet with an average term of 73 month.
Quarter end occupancy was flat sequentially at 96.5%, while the U.S. ticked down 30 basis points as our team is focused on pushing rate and term.
Rent change on roll over what's just under 30% and led by the U.S., 34%.
Our share of cash same store NOI growth was 4.6% and was impacted by 60 basis point reduction in average occupancy.
Again, consistent with our strategy to maximize long term lease economics.
Globally are in place to market rent spread increased once again and is now over 15.5% or more than $450 million and annual NOI.
Moving to strategic capital 2019 was a record breaking here, we raised $6.5 billion of equity from 75, new and existing investors and grew our third party AOMT $38 billion.
Our strategic capital business delivers a durable revenue stream with 90% of fees coming from long term or perpetual vehicles are critical differentiator that is often overlooked and undervalued.
Deployment, we had a record year for development starts and stabilization, we started $2.9 billion in projects, 43% of which for build to suits stabilizations for $2.5 billion with an estimated margin of 37% and value creation of $911 million. Additionally, we.
Realized 468 million in development gains in 2019.
We continue to have significant investment capacity to self fund our run rate deployment for the foreseeable future.
Over $11 billion on liquidity and potential fund sell downs as well as an incremental 4.5 billion of third party investment capacity in our ventures today.
For 2020, given we just held at our Investor Forum in November our guidance remains consistent and includes the acquisitions of IP tea, which closed on January and Liberty, which we expect to close on February four.
Sure the highlights and then our share basis, but for complete detailed refer to page five of our supplemental.
Our cash same store NOI growth range is unchanged at 4.25% to 5.25% and I'd like to highlight two points first we're increasing our 2020 global market rent forecast by 120 basis points to 4.8%.
This increase will have a minimal impact on same store this year, given our lease expirations, but importantly will increase our mark to market and future NOI growth.
And second the first quarter of 2020 will be up against a tough comp from Q1, or 2019, which benefited from an 80 basis points occupancy uplift.
As a result, we expect same store NOI growth to be lower in the first quarter, but then accelerate in the back half of the year.
For strategic capital, we expect revenue, excluding promotes a $350 million to $360 million and net promote income of $115 million.
The I.P.T. integration is largely complete and the Liberty closing preparations are on track, we're confident about hitting our liberty synergy targets on day one.
For dispositions, we now expect a range of $1.3 billion to $1.5 billion, which includes approximately $1 billion of sales from the IBT and Liberty portfolios.
When we announced the IP and Liberty acquisition, we identified approximately $3.8 billion of combined non strategic sales on an our share basis.
This balance $350 million has already closed or under contract and with the sale of an additional $1 billion. In 2020, we will have approximately $2.4 billion or nonstrategic assets remaining at the ended the year, representing just 2% of our asset base.
These are good assets, we will work through these portfolios in due time, and we don't see a need to hurry given our low leverage at 18%, we will dispose of the nonstrategic asset at a pace that allows us to match sales proceeds.
Deployment opportunities.
For net you in a we're forecasting a range between 275 at $285 million, which includes $6 million to $8 million of onetime transition and wind down costs related to liberty.
Excluding these costs and you'll generate growth at the midpoint of 2.4%, while managing 15% or real estate.
We expect 2020 core FFO to range between $3.67 and $3 and say five cents per share, including 15 cents.
Net promote income.
Year over year growth, excluding promotes is approximately 14% at the midpoint.
To wrap up we expect 2020 to be another exceptional year approach.
We look forward to adding liberty's high quality assets to our portfolio and welcoming 35 of their employees to the prolonged Justine.
With that I'll turn it back to Juliane for your questions.
Thank you I'd like to ask a question at this time. Please press star followed by the number one to withdraw your question press the pound Keith well pause for just a moment to compile the Q and a roster.
Your first question comes from Jeremy Metz from BMO. Your line is open.
Hey, good morning.
Just in terms of the the rent cited a house you. Obviously continue see very healthy spreads I think you had previously indicated some going to second half uplift was going to come from a higher percentage of coastal leases rolling here in the U.S. So as you as you look at the U.S.
Here in 2020 is there anything notable in terms of geographic breakdown or just box size breakdown that that's creating maybe an outsize opportunity.
From a ran side and from the increase to the global Mark to market 120 basis points that you mentioned, Tom how much of that is you asked for Cu driven thanks.
I'll take the second part of that Jeremy the the increase the majority of the increase of 120 basis points related to the U.S. Europe Continental Europe was about flat.
From a mix standpoint, nothing really stands out I mean things can move a little quarter to quarter, but given the size of our portfolio.
We are very well distributed across space sizes and geographies.
Yes in terms of markets I mean, you guys can see this reflected in the.
Brokerage that.
They can see rates from print give you a pretty good idea, where you know things are healthy and things are a I wouldn't say, we saw a bit of a slowdown in big box activity during the year 19, but at that actually picked up in that segment later in the year. So there's anything really new it's that you know them.
The demand is strengthening a little bit and big box.
Your next question comes from Derrick Johnston from Deutsche Bank. Your line is open.
Hi, everybody. Good morning. Thank you just a follow on do you feel this big box demand could be.
Due to any delta that we've seen with the phase one trade deal completed or Brexit Bill visibility and how is 2020 lisi leasing velocity feeling to you guys in shaping up from your vantage due to these two.
Event. Thank you.
Yeah, I don't think that the a pick up a big Bucks has anything to do as a to.
Geopolitical items, you mentioned and a year starting up pretty good.
Early in the year, but I I'd say, we feel a little better than we did a quarter ago. So things are starting off.
Your next question comes from Craig Mailman from Keybanc. Your line is open.
Everyone I'm just quickly on the a clarification Tom it sounds like nothing in the underlying assumptions changed here probably in guidance, but does the improved market rent growth assumption change at all the accretion or estimates for IP tier LPT and then just separately.
I know you guys had been aggressively trying to kind of push rents over occupancy, but as you think about kind of revenue management here is there a lower bound.
How far you'd want to see the fall here.
Just given kind of the the timing it takes to recoup.
The loss revenues from downtime.
Got to Craig I'll take the first part of that on the accretion from higher rent growth given the relatively low remaining role.
For IP T. and the LPG portfolios post acquisition similar to the project portfolio, you won't see much to pretty minimal impact.
For 2020, but again as you point out the important thing is that it's going to build our in place to market and.
Drive our same store growth even more in the out years.
What you respond to the revenue management.
Yeah, I thought I'd hesitate to put a lower bound on that but I I would say that in general has a good opportunities for us to introduce we've been a you know 97% range and as you can see particularly in the U.S., where we had the strongest market opportunities were ticking down and we're very comfortable with that.
And the.
And our mid 96 range historically, a 95% in sort of Diana a rule of thumb in this business I think that may be changing.
So rather than get specific I would just say, there's some room to go we're comfortable.
Pushing either.
The markets that have.
Have higher demand as a percentage of base.
Tolerate lower occupancy because it represents fewer periods of.
Lisa and markets that have lower percentage of growth compared to base need to be more full.
To to have the same equivalent pricing power.
Your next question comes from Nick Yulico from Scotiabank. Your line is open.
Thanks, I just wanted to hear a little bit more about kind of what drove the increase in development guidance and I know you gave the you know the mix on some of the spec versus build to suit, but how are you thinking about.
Increasing development, right, now and particularly which markets do you think it's really attractive.
Yes, So let me let me a at least over that.
So if you look at the health in the markets as a.
Defined by vacancy rates I said earlier, that's a that's a good start.
We want to focus on markets are constrained more in a in the U.S. that that's new Jersey that southern California, That's the Bay area.
But it also includes some sub markets.
Places like Dallas or Chicago.
In Continental Europe . There there are several places like to be doing more development.
But there you are seeing constraints on supply more more significant than really anywhere else in the world.
So.
The recent the number for of course starts went up is that we have more visibility into into this year as we get closer to this year. We were a couple of months earlier so.
Some of the things that we weren't sure we're going to happen to happen in a positive way. So the numbers are up but you know.
Just like for many years of commented on acquisition volume being highly predictable.
Spec portion of the development volume.
He is also has some volatility associated with it we're not compelled to start spec development and those are really dependent on minute by minute market conditions and the supply demand dynamics in those markets.
And build to suits will build because we're pretty sure if the demand, obviously, there, but but 60% of the sport start to spec and if the market is better.
Do more in that market is not as good we'll do less.
<unk>.
Your next question comes from Jamie Feldman from Bank of America Securities. Your line is open.
Great. Thank you I was hoping you could take kind of a big picture viewer provided big picture view, maybe reading from.
From the holiday season, and just kind of the conversations you're having with tenants where does it seem like people still need to get their supply chains, right, where does it seem like there's still.
Things that aren't going so well just as we we've been at this for several years now just how should people think about the runway ahead.
Well, a retail sales and.
The online category grew at 18%.
And in the bricks and mortar category. It shrunk in real terms. So I told you were kind of demand is on the margin and and that demand is going up.
I mean, Amazon is a big chunk of it and they are probably more active every you're certainly going forward, we see them being more active than before but they're they're 40 some percent of the market. The other the other people are catching up and ER and we're seeing a broadening of demand for e-commerce facilities.
As we move further into this category so.
E Commerce is very strong and I would say.
The margin be autos are probably a little.
Well, we carry than they have been historically and that sort of a global thing.
And probably housing is likely to be stronger Dan on the margin them we.
So last year.
Your next question comes from a Ki bin Kim from Suntrust. Your line is open.
Thanks, and good morning out there.
So if 29 team with the first year, whereas national supply of 1.6% growth how strip demand of about 1.1% and there's probably a good your degree of nuance and dose that has six for example in L.A.
Hi doesn't contribute much could a national demand growth numbers, because you can't absorb was not available.
So when you kind of dig into the numbers.
What do you think appeal beef.
<unk> exposure is to unfavorable markets, where we're real supply is kinda eating away at the demand.
Well I mean, if you take.
Are you a smart kids that are in the soft side, I would say Atlanta, Houston, and Pennsylvania would be the three markets.
Dallas has come up the list ounces just had an incredible.
A run in terms of demand much better than we expected.
And those markets those three markets.
Represent that Theyve done leasing that remains to be done in those markets. This year is about 14% of our total leasing.
And once you add IP t. and LPT interestingly that number goes down to 12% of the remaining leasing that we have to do this year.
And and the global portfolio also is 12%. So there is no over concentration if you will in the weaker markets are exactly in line.
With our with our overall markets and they're actually the percentage is coming down as a result of these two acquisitions what are they.
Central Valley Central PA, if I said something different these guys are give me hands that group [laughter].
[noise] anyway.
So no we care markets are proportional to all our other leasing EM and we're basically not concerned about it.
Your next question comes from Blaine Heck from Wells Fargo. Your line is open.
Great. Thanks, Good morning out there maybe I can do it the development starts guidance question from a different angle 2019 starts came in at 2.9 billion at your share which was over a billion dollars more than you had guided to at the beginning of 2019.
For 2020, and despite the I.P.T. and LPTA acquisitions, you're looking at start guidance that 2.2 billion at your share. So I guess I'm just wondering how much conservatism is built into that certain number and what are the chances we could end up closer to 3 billion again this year.
That wouldn't be a good question for you to ask US next year, just like you pointed out [laughter] I don't know I mean, you know we don't feel compelled to do any development are there then places workers customer demand and I think to try to predict.
Or something is actually irresponsible because it then gets the organization to drive to a number and when we don't need to drive to a number I mean that nobody gets paid for driving to a number or anything like that we all get paid as the company does well and the will do whatever we can to make sure that the market same balance.
And that our developments lease up appropriately and that we have good margin. So it's all dependent remember a year ago.
When we were sitting right here, we had just seemed to stock market decline significantly we have ratcheted down our business plan and the world just look very different than the way. It ended up playing out and by the way we weren't the only people who are conservative in our outlook that wasn't a responsible thing to do.
But as the year unfolded and we saw demand being better we obviously scaled up our activity we have the land to do it we have the talent to do it but we don't feel compelled to do an unleveraged man.
We will always tell you exactly what we think in a moment.
But particularly with spec development, we will ratchet that down or up.
As the markets helmets, and remember that our development program, it's 200 rough roughly speaking 200 beds.
Cross 65 different markets so.
You know, it's big and it's going to be dynamic overtime.
Your next question comes from Tom Catherwood from BTIG. Your line is open.
Thank you very much following up on Brians question on the developments, obviously huge start quarter in the fourth quarter.
And back at the Investor Day Hamid you had mentioned how the development timeline has extended from nine to 12 months to kind of 18 months plus just given the complexity.
Due to that and the starts does that mean you need to carry more land on your books to continue to feed the development pipeline and if that's the case kind of where are you looking from a complexity standpoint, or a risk standpoint as far as kind of how far you out you're willing to go to take risk one land right now.
Yeah, if that were in time, if that weren't the only variable that that would be right conclusion to draw but remember there are two other variables that are going on one is that we generally trying to reduce the land as a percentage of our total assets around the company, we're almost to our goal I'm not quite under actually some markets where we are.
Then on land and other markets, where we are balance so that's one headwind going.
The other way and also we're controlling a lot of land or via options and other things that don't show up on the balance sheet. So that's how we're kind of dealing with the need for more land without taking on more balance sheet exposure, Mike you want to say anything about that anymore anymore, but.
Yeah, Hi in terms of our.
Land exposure I think we're in pretty good shape, we manage that very effectively last year, and I think we'll be back and land and our.
Strategic spots going forward in the major markets where customers are.
Migrating to and I think we're in good shape there.
I'm wondering like the extension the development I'm, sorry be extension in the development.
Cycle is mostly on the front end to end on the entitlement side I mean, it's not taking us any longer to physically built buildings and certainly our lease up assumptions to get them stabilized has not been extended so really it's on the front end on the entitlement.
Your next question comes from David Rogers from Baird. Your line is open.
Yeah, Hey, everyone. Tom you did a good job at the beginning of the call I think laying out some of the supply demand fundamentals that you guys track and we all these different numbers, but I think one of the things that had been a little concerning was just kinda no matter what source or use kind of net absorption before the impact to construction has been kind of trailing a little bit lower I guess, maybe through a couple of questions at that one is are you.
And seeing that as well and can you kind of didn't know where thats coming from maybe outside of a global auto.
And then to maybe Hamid on your comment about Amazon being 40% of the market can you just clarify was that 40% of e-commerce or the embedded base in just kind of what you're getting out that comments I guess, yeah, they're actually 45% of E. Commerce sales I think is the latest number I might be a point or two but it's as a percentage of e-commerce and I think ecommerce like 12% of the overall market so they're like.
4.5% of overall retail sales.
I think this came up earlier, but maybe I can emphasize that demand is not uniform around the country and some of the markets, where there is exceptional demand the supply and just so tight that a lot of that demand just doesnt show up.
I don't know what that number is but I can tell you. It's a positive number and got after 10 years of supply falling short of demand.
We've all been predicting this year, where supply exceeds demand for the last five years and we've got it now so.
But I don't get I mean, it's a big market its 15 billion square feet, a base and we got 30 million feet of difference between supply and demand and that doesn't even take into account.
Other real estate Altra, industrial real estate Thats being scrape for higher and better uses and is becoming obsolete. So.
I'm not losing any sleep over that.
Hi, Chris do you have hey, Dave just on the specific numbers, we have net absorption into 40 in 29 team. The for your average is 250 million square feet, so pretty consistent with the for your average and really at work. There is a 4.6% vacancy rate that just made it more difficult to absorb stock and you saw some of that growth more in.
Price then in net absorption so rents were up 70% in the U.S. last year. When we look at the demand trends late in the year as gene discussed whether it's really good momentum in the fourth quarter or whether it's our proprietary indicators like the idea, which is at 61 makes us feel like growth will improve and 2020 .
Yes, the picture going into 2019.
Was much more negative than I mean or less positive I mean was positive but it was less positive than it is today mark market feels a lot better right now than it did a on the call a year ago.
Your next question comes from Jason Green from Evercore. Your line is open.
Just a question on development and yields in total you're developing assets now to 120 basis points spread for the supplemental I guess at what point do spreads become too narrow to continue developing assets.
When we start developing [laughter] chicken or the no I'm not I mean, you know 120 basis points is a pretty healthy margin when cap rates are as low as they are but you know we're really margin focused and if we can really get going in and pretty safe, 15% on spec and maybe low.
Teams on build to suit, we just won't do it I guess, we'll do a build to suit that about a 10% margin for a Kuwait tenant would the great correct credit.
We can easily do and sell or something like that but I mean, that's the range of it the only problem is in the last however, many years 10 years, we've we've had double or triple dose margin. So.
Someday, we'll have lowered them those margins for sure the market goes through cycles, but but there's definitely an arrow up a margins.
From where we pro forma these deals.
I would say nine out of 10 deals at least maybe even more maybe 19 at 20 of them.
We do a recap on we'd do a recap on every deal that we do want to stabilize them. We look at what it costs, what the elsewhere and and sort of greater performance on that I would say, they're very few of them that have any red sun them I mean, all of them at a big green numbers on them. So.
So so far so good and I expect that to continue for at least the the foreseeable future.
Your next question comes from Eric Frankel from Green Street Advisors. Your line is open.
Thank you I sincerely apologize for asking another development question, but can you basis based on your before you start getting a little bit higher development volume in 20 key talk about whether you think that overall supply is down to increase more than it has the last couple of years and how does that reflect end market rent growth generally.
And then second but it certainly seems like you guys are a lot more active and buying assets of different types and the New York City boroughs, but we also noted that Walmart dot com walmarts not to be using that Bronx facility. You guys acquired a couple of years on lease to them. So maybe just talk about your experiences there. Thank you.
Yeah, I think the experience in.
The Bronx has nothing to do with the real estate. It has to do with Walmart decision not to pursue a strategy that there were going to pursue we actually think releasing market for that building is is an upside from where it that building is lease so.
And obviously, we have moment, great credit on and so.
We're not I don't think it means anything other than a change in strategy of the of the company.
And with respect to supply picture I think we're feeling better about supply right now than we did that quarter to though gene when everything yeah I think in the.
For sure a quarter ago, we felt the little bit worse about supply and Eric If you look at the last couple of years.
And what's happened is that the development engine in the U.S. the industry just wasn't able to.
Chris and estimate.
For supplies. So I'd expect that you know next year same thing and it and it's the explanation is pretty simple and is very difficult to and more difficult everyday though.
This space, So I would probably say there is about.
Look if you.
We're all looking for things to worry about you know I would be more worried about a recession because of something like totally out of left field like this virus thing or something globally that can affect something more on the demand side than on the supply side supply. Maybe you know 10, 20 30 million feet one way.
Or another.
But that at the end of the day doesn't move the vacancy rate or the pricing power, but you know if demand falls off the cliff because of some unknown thing or war or some bad thing like that.
That that is the thing that I worry more about supply one way or another it's going to be pretty close to what we think.
Certainly a year out you have pretty good visibility into a supply is because you know two thirds, maybe three courses stuff that's going to be supply.
Should be under construction right now so we know kind of what that number is so really the wiggle room is on that last 20, 530% of supply.
Your next question comes from John and dining from Stifel. Your line is open.
Great.
Very very impressive 14% year over year growth, probably even more impressive as issuing 110 million shares that.
It looks like about 25 times forward multiple on a three six implied cap.
Tom If you if you're at Liberty to talk about it can you talk about.
Because of Fas 141, accounting, you're probably bringing a both the IP and the liberty portfolio and at a much higher GAAP cap rate than a cash cap rate are you at liberty to talk about the GAAP cap rate that these assets are coming in.
And also your thoughts on.
Fad growth and dividend growth.
For 2020.
[noise], Yes can't talk about the first component, but you can get to made it pretty well I mean, you know average leases six years and average built in rent growth in in these leases in is call. It 3%. So you can you can kind of do the math on three years of 3% that's how much the gap is higher than thanks.
By the way the reason I'm not going to get in trouble because I don't actually know what the number is but but the math on.
The map on that should be pretty damn close to two to make estimates and John I'll point you back to.
The presentation, we gave when we announced the transaction we had $25 million in fair value at least adjustments, but that also includes straight line rent adjustments and that's a net number because you you back out the straight line rent that's embedded in the IP tuna liberty portfolios, but more to come on that to your point about bad ultimate.
Getting to the dividend as we've said in the past.
We are dividend levels.
Are going to need to increase.
Pretty consistently with what you see our fad and if AFFO growth because we're well payout.
Cost as we tend to the minimum threshold, which where we're staying so.
Thats consistent theme you are saying here.
Your next question comes from Michael Mueller from JP Morgan Your line is open.
Yes, hi.
I think a pickup in demand that you were two Lehigh Valley. Just wondering can you give little more color and what you can drive.
Yes. The your question was a little little bit model, but I think I think your question, it's about recent activity and Lehigh Valley and.
Lehigh Valley has over the past year.
Experienced a little bit overbuilding, but.
News in the last six months pretty good so demand there is strong.
I would say that as contrasted with central Pennsylvania, where demand is still a little bit weak right now.
I think driving that is a combination of general supply chain modernization. So we see some customers who are feeding their store network and also for amount of E. Commerce also wanting to serve the greater.
A region in particular in New York, and probably you know record low vacancy in New Jersey.
Yeah, Southern New Jersey, there's virtually no product. So so a key message there would be the prioritization and proximity and the proximity of core Lehigh Valley to New Jersey and in particular, New York, That's that's driving that demand.
Our next question comes from Eric Frankel from Green Street Advisors. Your line is open.
Thank you I guess I've I guess of and we'll have a.
People are thoughts from a from earnings said this a this quarter, but up one quick question housekeeping item of $1 billion of sales from I.P.T.E. and Liberty how much of that as office and then second I think Walmart just speaking to them. They they debuted its state debuted a and automation product there.
To be using in their stores to distribute product.
Yeah, just directly to consumers be a pick up can you talk about automation, how that's impacting supply chains, obviously, amazon's always trying to reinvent how they're utilizing the fulfillment centers and maybe can touch upon how your other customers are thinking about it.
Well I'm going to pitch this too Chris because he spent a lot of time together with will have done on the topic of automation and its impact generally on.
Logistics demand then you know one of these days you may see a paper coming out on that that's pretty extensive and detailed.
But we don't think that.
It is a unit we think automation is a way of making employees more productive because it's so hard to get employees to do this kind of work I mean, that's really the impetus for automation.
And that the downside of automation is that unless you have.
Very standardized products.
The state of the industry such that you can have.
Special purpose automation or general purpose automation installed that can handle a lot of different goods sizes shapes et cetera, et cetera, we're marching in that direction, but we're quite some time away and also what we're hearing from our customers. The majority of our customers, particularly the threepl is that the capital.
Needs of automation are just way beyond our ability to be able to do that so and in order to implement automation they need to have longer term contracts with their customers and be able to amortize those investments over longer period. So Chris yes spot on an underlying the variety of operations are going on our.
And our customers space and that translates two things one is that an adoption rate of automation within logistics facility that is low and rising at a moderate pace and to the ROI and some of these investments are still pretty low given the complexity and the complex nature. Another point I make relates to pro.
Activity enhancing equipment. That's what this really is that's been around for a long time, whether you look back 40 years of forklifts, and so weve seen a constant effort to improve employee productivity within our facilities and this is no different as it relates to specific reference you make a kind of in store automation as well something we have seen in the marketplace or more.
Our requirements not just this or E com, but also to serve store fleets that are needing to handle this buy online pickup in store. There's there's more activity to also think about the existing supply chains to to support that activity in store.
Eric I'll respond to your first question relative to the split out of the 1 billion a sales for I PT and LPG I would I would say this is gonna be fluid.
But the office component that remains is quite small, but as we said we're going to match fund.
Disposition proceeds with opportunities to redeploy them on a.
And so I would say it would be fluid, but again the offices is a small piece that's left out of that yes. The non Comcast office I would expect to where we're through that so really office comes down to Comcast and that is a.
Pretty liquid pretty straightforward type of position and it's only a matter of what's the ideal time to do that and the dynamics with the customer.
Which is a very important customer anyway over overtime.
What what happens, but that's kind of there's not a lot of wiggle room on the economics of that deal. We know, it's 100% leased and we know what the economic sorry.
So obvious has gone we're not in a big hurry on the industrial.
Just kind of match funded.
We were 18% leased.
Percent levered so.
Why would you want to do more than match fund.
We're not in a hurry, it's a good market.
Your next question comes from Vikram Malhotra from Morgan Stanley . Your line is open.
Thanks for taking the questions two quick ones I'm on slide 15 of the slide deck you give.
The occupancy broken out by its size could you give us the rent spreads using that same breakout.
Yes victims, Tom the the rent spreads were pretty consistent this quarter across all the different size categories. I think the small space under 100, probably picked up a little bit.
Little higher than normal, but this quarter very consistent across all three.
Sizes, I would say small space.
Is recovered a bit small space was way ahead of big space, maybe or you're in a half ago. Then it went the other way and soften and now it's going back a little bit most recently the big space is recovering more in the last couple of quarters. So.
There are all even but they are coming to even from different directions.
Your next question comes from Manny Korchman from Citi. Your line is open.
Hey, it's Michael Bilerman here with many I mean I had a question for you just sort of about the sort of acquisition market overall.
We clearly know there's an insatiable desire by private capital to put capital to work really on a global basis in industrial my favorite asset classes in that way for the last few years and I wanted to get your sort of thoughts on fleets from secrets comment that he made earlier this year that.
The market is paying full price even for assets with works on them.
Their focus is on development and.
Granted it with self serving but he made a comment about the acquisition market sort of wanted to get your feel about what you see on a global basis about how investors are pricing assets and differentiating headsets and how that may play into your disposition plans as well.
Yes, I mean.
We basically been saying the same thing on more or less.
With a slightly different exit I mean, the acquisition market in Europe , which is remember that that's what they're talking about is pretty expensive and Oh you know if you have a good land bank and you are an active developer like they arm. We are obviously the best use of capital is to put your land.
Back to work and the incremental returns on those investments are quite high.
But there are still opportunities here and there.
That our price below replacement cost for example, short term income in Europe is discount. It. So if you have a building that has a two year lease on it or something maybe it perfectly good building, but you could buy that below replacement cost that kind of thing would be interested it but you can buy a billion dollars of it I mean, I don't know where you would go to buy billing.
Dollars and that kind of stuff in Europe .
The rest of the World is it is a different story I mean, there are places where I mean like in Mexico, you know if an acquisition opportunity were to come up.
You know in cap rates are for the very best product around seven but you can buy some things that are eight or nine and if you look at there.
Treasuries equivalent their treasuries theres, a big spread there in that market. So.
The global picture is a little different.
What I would generally agree with their commentary for Europe .
Team.
Yes, I wouldnt.
Add much to that and Europe , while expenses on a relative basis, you look at look at risk for yields in Europe , maybe a negative rates.
The best economies.
This is going to be four countries negative rates, so I'm not frankly sure that.
You know cap rate environment today in Europe . It is all that expense.
The other thing I would say about Europe Europe has it'll be interesting to do the math on this we haven't but this is I guess I guess there are lot of institutional investors in Europe that are focused in Europe and the size of the industrial asset class in Europe , it's still a relatively new industry and institutional quality products.
Proportionately as a lot smaller than it is in the U.S.. So you've got a lot of institutional private capital.
Focused on a market with fewer opportunities and I think thats pushing on yield.
In Europe pretty hard so development is preferred to two acquisitions and all these markets anyway.
That was the last question. Thank you for joining our call and we look forward to talking to move next quarter, if not sooner picture.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.