Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly until that time your lines will again be placed on musicals. Thank you for your patience.
[music].
For today's call at this time all participants are in a listen only mode. Later, we will conduct a question answer session. If he would like to ask a question. During this session. Please press Star then one on your telephone if he would like to withdraw your question. Please press the pound key.
Also note this conference is being recorded.
I'd now like to turn the call over to Tracy Ward Tracey you may begin.
Thanks, Mariama and good morning, everyone welcome to our first quarter 2020, <unk> earnings Conference call.
Supplemental document is available on our website at <unk> largest dotcom under Investor Relations 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 pro largest operates as well as management's beliefs and assumptions.
Forward looking statements are not guarantees a performance an actual operating results may be affected by a variety of factors for list of those factors. Please refer to the forward looking statement notice in our 10-K R. S T SEC filings.
Additionally, our first quarter results press release and supplemental do contain financial measures such as that's also an EBITDA that are non-GAAP measures and in accordance with Reg G., we provided a reconciliation to those measures.
Good morning, we'll hear from gene Reilly, our Chief investment Officer, who will comment on real time market conditions, and Tom Olinger, Our CFO, who will cover results and guidance Hamid Moghadam.
Gary Anderson, Chris Katyn, Mike Curless at Nekritz, Coleen, Mcewen and Tim aren't are also here with us today with that I'll turn the call over to gene and Jean will you. Please begin.
Thanks, Tracy we appreciate everyone joining us today and we hope you are yours are all well.
Glad to report that our teams are healthy and working productively on a remote basis.
Our first quarter was very strong in all parts of the business and Tom will cover these new channels.
I'm going to focus on what we're seeing right now and our outlook for the year.
Well, we're just 30 to 90 days into the cold in the economy. We are seeing short term effects play out very differently across our customer industry sectors.
At this time, roughly 60% of our customers are growing.
40% or shrieking.
Our shrinking.
Next week, Chris King will be issuing his force called Big White paper, specifically on this topic of customer demand segmentation.
The extreme entered this spectrum categories, like food and beverage and consumer staples and sales up significantly and Conversely clothing sporting goods.
In home furnishings are all down sharply.
Our customers in contraction.
Going to more short term shark some work <unk> fairly quickly.
It's a longer transition to normalcy and.
Unfortunately, certain businesses will not survive.
At the same time dependent make has led to significant growth.
For the industry's I mentioned, serving the stay at home economy.
And we continue to experience elevated ecommerce demand.
40% share of new leasing versus 23% pre crisis.
With the benefit of customer dialogue and applied research, we factor in Tailwinds and headwinds to arrive at our <unk> revised 2020 earnings guidance.
Our portfolio quality customer composition.
And balance sheet strength.
Our mitigating the headwinds.
And our discipline efforts to dispose of 15 billion of non strategic assets over the past several years.
Dad is paying dividends today.
Turning to the long term impacts we believe some of the changes brought on by the pandemic will be durable.
Nobody is very likely to accelerate a share shift from brick and mortar to E commerce retail.
We also believes the growing importance of safety stock will lead to higher global inventory levels over time.
These trends all increased demand for logistics real estate in the long term.
But we'll also have a positive effect on 2020 activity and we're already seeing this.
Chris and his team have updated our forecast for logistics real estate market fundamentals and now expect the filing for full year 20 Twond.
In the U.S. supply will total 225 million square feet, an 18% year over year decline.
The U.S. net absorption will total 100 million square feet, the lowest level since 2010, and a 55% year over year decline driving the vacancy rate up 90 basis points to 5.4%.
Europe will have similar reductions in the supply and demand, resulting in 130 basis point vacancy rate increase to 5.2%.
Japan's vacancy rate will increase from a record low of 1.4% to 2.8%.
In summary occupancy in all geographies will decline, but also in the year at very healthy levels historically.
[noise], our proprietary lead leasing data shows that the Splunk and leasing activities, we witness in March and talk to you all about.
A couple of weeks ago has settled down we're now seeing volumes generally in line with historical trends.
Forward looking data continues to be encouraging.
During the last 30 days, we signed 198 leases amounted to 17 and a half a million square feet, that's up 21% year over year and roughly flat adjusted for portfolio size.
Our lease proposal generations are up 21% year over year.
At least in negotiation gestation periods for new leases have declined by about 14 days year over year.
And retention was just over 80%.
A couple of hundred basis points higher than comparable historical periods.
After slicing the data in several different ways, we see three cleared instead. This morning first essential consumer product sectors are driving the demand second E. Commerce is driving demand across industry sectors and there are larger customers are very much better.
Than smaller customers in this environment.
No no update on rent relief requests growth has slowed here and today, we have received requests representing 4.3% of gross annual rent.
Of these request, 70% will not granted 23% remain under review.
And 7% had been granted in the form of rent deferral loans.
Representing 27 basis points of gross annual rent.
And then averaging about 33 days of rent per customer.
As mentioned on our last call. This relief is targeted at our smaller customers, who legitimate need stemming from Hogan and not for opportunistic request.
We believe the total rented for loans granted will eventually amount to about 90 basis point gross annual rent with these loans scheduled for repayment over the remainder of 2020.
Turning to the strategic capital business, our investors remain very positive.
On the logistics realistic exactly.
As noted on our last call the vast majority of redemptions today, we're in progress prior to cope with 19.
And there appears to be good secondary market interest for some portion of the redemption activity.
But today, we have seen no trades on the secondary markets.
Next I'd like to provide some context for the updated capital deployment gardens, Tom will detail the moment.
This guidance assumes virtually no incremental activity in acquisitions dispositions speculative development.
Or contributions.
Rather than speculate on future market conditions, we're guiding to volumes that have largely been accomplished already.
Most of the volume predicting between now and <unk> year end is built to suit activity, where the pipeline remains active with multiple leases signed postcode actually.
We continue to work closely with customers and municipalities on 30 ongoing projects in 14 markets.
Construction continues on 22 these projects with eight having been halted by local authorities.
And today, we have yet to stop a project at the request of a customer.
Well, our current leasing beta is holding up very well and we see extremely encouraging trends with these commerce leasing.
And you're planning on a reduced demand environment through the end of Tony Tony.
We will have opportunities to serve our customer segments in expansion mode.
And we will need to support others not so fortunate.
We expect to serve as a reliable alternative for build to suit customers.
Take advantage of investment opportunities as they emerge and manage our strategic capital vehicles prudently and Opportunistically.
In this environment.
With that I'll turn it over to Tom.
Thanks Gene first and foremost I want to echo genes introductory comments and wish you and your families. The best of health during these challenging times.
Ill briefly discuss Q1, and then take you through our updated guidance.
Joining with results core AFFO for the first quarter was 83 cents a share which was in line with our pre cobot expectations. We did recognize an expense of $5 million in the quarter, we're a little less than one centsper share related toward donation to the pull out just foundation for Cobot night gene relief efforts.
During the quarter, we completed the acquisition and integration for both the I.P.T. and Liberty portfolios, we hit our synergy targets and both portfolios are performing well and in line with her expectations.
We leased 34.7 million square feet in the quarter with ending occupancy of 95.5% down 100 basis points sequentially as expected rent change on rollover remained strong at 25% and was led by the U.S. at 31%.
Our share of cash same store.
You know why growth was 4.6%, which was about 30 basis points above our forecast.
Same store average occupancy for the quarter was 85 basis points lower year over year again, consistent with our expectations.
As of yesterday, we've collected 85% of April rent, which is in 1% of our normal pace.
Rent due dates varied by country and about 5% of our rent isn't due until the back half a month.
As gene noted, we granted $18 million and rent deferrals.
$9 billion, which relates to April all granted deferrals are structured to be repaid and 2020.
For deployment, we started $300 million, a new development projects, which were 85% Preleased stabilizations were $690 million with an estimated margin of 39% and value creation of $270 million.
Additionally, we realize more than $280 million and development gains through early April.
Looking to the balance sheet, we entered this crisis in a position of strength.
With significant liquidity and borrowing capacity.
What did he at quarter end was $4.6 billion and we have cleared out our debt maturities until 2022.
The combined leverage capacity for watches center opened in the vehicles at levels in line with current ratings is well over $10 billion.
Turning to guidance for 2020, our approach is twofold first to exercise Prudence and second use a broader range of outcomes given the uncertainty.
While the full economic impact is difficult to quantify or guidance assumes reduced demand into the third quarter with the operating environment beginning to recover towards the end of year.
Here are the key components of our guidance on our share basis.
Our cash same store NOI, we are decreasing the midpoint by 225 basis points and now expect growth range between 1.75 and 3.25%.
The decrease in the midpoint assumes average occupancy will be down 100 basis points and rage between 94, and a half and 95.5%.
We expect retention to increase about 500 basis points and be in the mid 70% range.
We're estimating bad debt expense to range between 100, and 150 basis points of gross revenues.
The midpoint of 125 basis points compares to 20 basis points of bad debt expense embedded in our prior guidance.
It's important to note. This bad debt midpoint is on an annual basis, which means we preserved and much higher percentage based on the remaining 2020 revenue, particularly if our positive cash collection trends continue.
As we discussed in or call earlier, this month or bad debt expense peaked at 56 basis points during the GFC.
At the midpoint, our annual guidance for bad debt is more than doubled our historical high in almost three times that level at the upper end of the range again on an annualized basis.
As gene mentioned, we believe rent deferrals granted will amount to about 90 basis points. While we expect these deferrals to be repaid we have factored in the potential for credit loss for the deferrals as well as elsewhere in the portfolio.
We have included the impact of downtime, resulting from potential bad debt in our occupancy forecast.
We're assuming no rent growth for the remainder of the year.
Rents for leases signed since March 1st and then about 200 basis points ahead of our expectations, while rents for leases signed in the first too much of this year were about 100 basis points better.
We expect rent change to be in the bid at 20% range and keep in mind are in place to market rent spread is currently approximately 15%.
For strategic capital, we expect revenue excluding promotes to range between 345 million and $355 million down $5 million due to lower forecasted deployment fire funds.
We are maintaining or net promote income for the full year of 15 cents per share based on quarter end valuations. The vast majority of the 2020 promote revenue will be recognized in the second quarter.
For net you know, we're forecasting range between 270 million in $280 million down $5 million at the midpoint.
DNA for the year is down about $10 million due primarily to lower TV.
Offset by the 5 million dollar contribution to the foundation.
From a foreign currency standpoint, we continue to be extremely well insulated from FX movements through the next three years and our U.S. dollar net equity is over 95%.
As gene mentioned, we stopped all new speculative development halted construction on many spec projects that had recently started we now expect development starts for the year to range between 500 $800 million would build to suits comprising more than 70% of this volume.
Cost to complete or active development pipeline is currently $1.6 billion.
For acquisitions dispositions and contributions guidance, while not our expectation we are simply forecasting no incremental activity other than a few transactions currently under contract.
Our net deployment uses we're now projecting $200 million at the midpoint down $450 million from our prior guidance. The net deployment changes had a minimal impact on earnings given the timing about activity.
Taking these assumptions into account, we're lowering our 2020 core AFFO guidance midpoint by 11 cents.
Now expect to range between $3.55 and $3.65 share, which includes 15 cents I'm not promote income.
We believe we've approached the forecast quite considerably with no assumption reasonably made more severe given what we know today, we have limited roll dramatically reduced deployment and a reserve for bad debt and multiples of the GFC.
And even with that year over year growth at the midpoint, excluding promotes remains strong at over 10% all while keeping leverage flat.
We continue to maintain significant dividend coverage at one and a half times and our 2020 guidance implies a payout ratio in the mid 60% Lynch.
Longer term, we feel more positive about our business given the emergence of two new structural demand drivers first there will be a need for more inventory of supply chains emphasize resiliency over efficiency and second an acceleration of ecommerce adoption.
Closing 2020 will be a tough year for many however, despite the uncertainty for watches is very well prepared we entered this unprecedented time with the healthiest fundamentals on record and extremely well positioned portfolio a significant in place to market rent spread.
And a strong balance sheet and with that I'll turn it back to the operator for your question.
Thank you as a reminder, at a star one on your telephone keypad. If he would like to ask a question. If you have additional questions you may reenter the queue.
Please hold while we compiled acuity roster.
Your first question comes from Jeremy Metz with BMO. Your line is open.
Hey, Thanks June you gave some good high level color here at the start I was just wondering if you could break it down a little further here.
In terms of what you're seeing there first or if you foresee any outsized impact from any particular region or city big box or small botch didn't show for second tier or secondary markets, maybe just a little color what you're seeing across those channels. What your expectations are men as a follow up question.
Same store pool.
Your occupancy and bad debt assumption similar for the recent portfolios you close.
Liberty in particular thanks.
Okay I'll.
Jeremy I may have to Tom comment on the on the last question, but in terms of the sort of the composition of what's happening on the demand front I.
I mean, I'd tell you, it's really more industry segment.
And size segment than any particular geography.
Obviously our.
Houston operation is facing headwinds from both coated and plummeting oil prices. So that's that's a tough this market right now.
But otherwise you know the industry segments I mentioned.
Our strongest and clearly in this environment smaller customers are having a tougher.
A tougher times and it's been larger.
And with respect to the.
One of the market I'd I'd, probably throw in there as Atlanta.
Which which in Atlanta, we actually we haven't done fairly high percentage of a smaller customers who as well.
So Tom I know, if you want to want to take the yeah.
Yeah, Jeremy on that from a bad debts perspective, we looked at a portfolio across the entire stack, we looked by industry.
Customer composition, and we looked at it consistently across the entire portfolio. So we don't see anything unique about any of our recently acquired portfolios.
Your next question comes from Manny Korchman with Citi. Your line is open.
Hey, everyone. Good morning.
Me too early to be asking about 2021, but just given the sort of.
Yes flow town in pace or trajectory in 20, how do we think about here you're 2021 gross.
And how that's going to sort of either slower or maybe rebound quicker as we sit today.
I think our business is gonna be somewhat slower it for the vaccine and a much higher after the vaccine. So you tell me when the vaccines gonna come through which is the real permanent solution and I'll tell you how that mix is going to work for the year.
Your next question comes from Jamie Feldman with Bank of America. Your line is open.
Thank you I was hoping you can focus a little bit more on the smaller tenant discussion.
What have you seen in terms of government stimulus being able to actually help out those tenants.
Just maybe some more color in terms of how bad is it really for small versus large and what are the factors you guys are watching to see if they can get help or they're not going to get help.
Just as much color you can provide would be great.
So Jamie let me first make a distinction smaller tenants doesn't necessarily mean, a smaller companies that occupied those spaces. So you got a you've got to distinguish between the mom and pops and smaller locations or you know creditworthy companies. So not all small tenants are under pressure.
Secondly, the you know if you're at a contractor or supplier to residential construction or some kind of an auto related views for sure your business is down and and you're going to be struggling in this environment to seem to tell how the government support is gonna help.
But at least one the levels of support that we've talked about so far I don't think it's fully replaces the revenue and the margins that they've lost during this period.
But I can tell you a lot of the demands for their products its deferred demand and if they can make it through this crisis I think they'll be the beneficiary of this spring back.
On the other side of it so tough to tell the a that stimulants it's.
And in place for a little less than two weeks.
But also the other thing I would say is that there is it's kind of monetary stimulus.
On top of the fiscal stimulus that's come in so ER and the attitude that I see with the banking system. This time around because the banks are and you guys by the way would know better than I would because you work for a lot of banks, but the banks.
Our often times, but there's certainly better capitalize and people seem to be much more cooperative in terms of working.
With their customers by accommodating and because everybody realizes that this is not anybody's problem. It's something that happened definitely this is isn't that definite changing attitude with the government fiscal and monetary and and with the banking system. That's distributing the fun. So I think they're going to work with their customers, including the smaller.
He wants but some of them Unfortunately wont make.
Your next question comes from Vikram Malhotra with Morgan Stanley. Your line is open.
Thanks thing the question two quick ones really just one on the bad debt.
That you've baked in can you just clarify have you seen any bad debt in the first quarter and can you talk about the second quarter and then just second question on market rent growth you referenced baking in old rent growth I just wanted to clarify what are you referring to market rent growth in 2020, and just give us a little bit more color maybe by by major region.
Well, let me pick up on the rent growth question, and then I'll pitch it over to Tom for the first part of your question on credit loss.
Let me give you the facts on rent growth rent growth in January and February were 100 basis points higher than what we had projected toward those specific spaces.
Rent growth for March a surprisingly was 200 basis points higher than what we had projected for don't spaces. So so far we haven't seen evidence of rental decline or deceleration in growth. However, we've assumed that in the forecast that Tom shared.
Do you because apps and you know perfect information you got to be conservative with respect to rental growth for forecast. So those are two specific data points. The third data point I'll I'll give you is that we had project that certain grants for the two acquired portfolios Ike Btn LP tea and in both cases.
He says the spaces that weve rolled over have been on the range of 4% to 5% higher rents down we had forecast for those portfolios late last year, when we underwrote them. Tom you want to talk about the credit watch.
Yeah, so on bad debt experience and the first quarter, we saw write offs of 25 basis points.
And in April we've seen nothing unusual as I talked about our our April collections are trending normally as did March and as I mentioned you know we were conservative here by almost any measure you can look out on the bad debt and.
We are.
Reserved.
Separately to cover a really [laughter] severe downside on the our side.
Your next question comes from Blaine Heck with Wells Fargo. Your line is open.
Great. Thanks. So you guys mentioned that you guys or excuse me moving forward with a 30 build to suits under construction.
One other build to suits that might have been in the plan to start construction later this year and if so can you talk about the probability of those continuing as planned as well and whether there are any kind of renegotiations happening when those with respect to the rent side of the equation.
[noise] Hey blades.
Mike Curless [noise].
The 30 build to suits are well underway, we haven't heard anything for many customers to say differently. So that is a very good sign.
And in terms of the prospect list I would say, it's a bit shorter in number but the people on that list are our as active as ever E. Commerce is a big driver. Those you read a lot about amazons activity across the board we've seen signed leases this year in.
Order of magnitude, we signed 10 leases this year compared to seven this time last year and three those as gene mentioned.
Came in the last several weeks so there's a bunch a good signs with respect to the underpinning of E commerce relative to build build to suit there's I'm not seen any re negotiations underway and we have really good opportunities for tailwind here given the lack of spec that you're going to see in the marketplace. So I'd say the prospect list is naturally a bit shorter.
But pretty robust and we're optimistic about the build to suit activity this year.
Your next question comes from Jason Green with Evercore. Your line is open.
Good morning, just a question on bad debt guidance on the business update call you mentioned that bad debt could trend as high as 100 basis points and now guidance incorporates a 125 basis points at the midpoint I know, there's a similar figures, but just curious if you saw anything in the last few weeks that made that estimate trend higher.
No just let me clarify we did not actually guide on bad debt a in any way and we were very careful to drive the distinction between operating performance and any kind of financial guidance. Then number that we talked about that 100 basis points on that call is the equivalent of the 90 basis points.
That gene talked about that is the forecast amount of total rent that is gonna be subjected deferral.
That is that related but just a but not the same concept as the write off because we fully expect.
Obviously, the ones that we have deferred to make good on that deferral no. It portion of them, we'll we'll probably default and a portion of the ones that didnt asked for a deferment. Good default, so they're 90 basis points of deferral.
He is very different than the 125 basis points on an average of credit loss. The other thing I want to I want to make sure you understand is that the 125 basis points is applied across the year.
And certainly as you heard from Tom the first quarter was 20 basis points and we know what that was so we're carrying another 100 basis points of room from the first quarter into future quarters, and we've got a 125 basis points to start with across the whole year. So the amount that we have reserved.
So anything that could default.
Is significantly higher.
And then what appears on the surface, let me be even more specific.
Not all tenants are gonna default that are going to default, they're gonna default on April 1st [laughter]. If they developed are likely to default during the course of year saw an average they're going to default in July you, just ratably divided which means on that basis alone. We're almost three times the actual number cupboard.
For for default risk and default outcomes and another way you can get added.
Is that in the global financial crisis that the total.
No that debt average 56 basis points annually and the midpoint. This time around its 125 basis points for the remaining more than 125 basis points, where the remaining three quarter significantly higher. So we've got a scenario multiples of times of the global financial crisis factored in.
Your next question comes from Craig Melman with Keybanc capital markets. Your line is open.
Hey, everyone just [noise].
Two quick ones here, just curious any of the rent refer requests from tens that paid April but are worried about being able to pay may and then just separately maybe for Chris are you kind of put out.
Hundreds.
Or you put your net absorption figures and construction figures. This year just as we think about 21 I know your car given guidance, but do you think the slowdown in deliveries in 21, then rebound in the absorption.
Could could result.
Back to snap back in 21.
I do I don't know what Chris Thanks.
But again snap back is not going to happen until everybody has got the all clear signal on the on to help front.
And why there was the first question on our government.
Everybody talks about the government you know when are they going to.
Put three people back to work and open up the country for business and all these demonstrations that that we see.
That's got nothing to do that even if they open up the place for business a lot of a lot of people will have to go back to work and will but a lot of people don't have to go to work wont. So I I don't think the the government action is gonna be the trigger for that I think the all queries is going to clear.
I have to come from the from the health front.
Exactly right and I think.
Let me just finish up the answer here, which is I mean, it's already given your view on the demand, but it's also important to remember a view on supply right now in the marketplace. We were seeing projects delayed or not started and that kind of a material impact on the outlook for deliveries in 2021.
Your next question comes from Tom Catherwood with B T. G. Your line is open.
Excellent. Thank you and good morning, everybody.
You mentioned that customers are focusing on resiliency over efficiency now how do you see this playing out and kind of how are you positioning your portfolio with investments are built to suit activity to assist.
Hi, there with the shift or would it take partnership.
Hey, Tom So I think our portfolios are already positioned to capture that activity number one just given the proximity to portfolio to the consumption base and as we see the acceleration further acceleration long term of ecommerce trends I think we are right there to capture.
That and then on the resiliency versus efficiency comment, it's clear customers will carry more inventory to protect themselves against a future shocks, we'll see that and they're going to want that inventory close to their consumption days right to meet consumer demands for.
Delivery time, so I think our portfolio today's positioned and we're going to continue to build out or land bank and further.
Solidify our our portfolio.
Your next question comes from Jon Petersen with Jefferies. Your line is open.
Okay. Thanks, and think about six weeks ago are still you guys announced the share buyback program, just curious given public perception around share buybacks and landlords for that matter or do you think it makes sense the buyback I'm, even if the stock price does fall substantially.
I could sneak in a second unrelated question just curious what social distance see might mean for some of the different industries and your space.
Obviously, some users have very few people in.
The facilities any onetime while maybe.
Oh, I'm, sorry, I think you cut off but I get the gist of your question.
On social listening thing I think there are certain categories of our customers that.
There are businesses will continue to suffer like the people servicing the convention trade and hospitality I think or airlines I think those those businesses will continue to suffer if you mean, what does it mean in terms of the actual occupants of our buildings that people working on building.
The most people intensive operations that we have our or they ecommerce players.
And you have read the same things I have about Amazon another ecommerce players and you know some of the controversy that's been out there, but I think those companies had been very responsible actually in terms of not only providing a lot of employment. During this difficult time, but also having a lot of controls in terms of checking people's temperatures and and.
Now I understand there going to go to some.
Pretty regular testing its urology testing, so I think they're doing the best they can to actually get people back to business, though you and I can actually get our groceries and other things and I actually commend them for that we'd respective the share buyback program. You know, we did a buyback a 35 million.
I was just stuck when the stock got into the sixties.
And.
We felt that that was a very very significant discounts you I Navy and it was a compelling opportunity and to be honest with you after doing that I changed my mind than I thought the perception of that it's not going to be great. So we took all the profits that we made there and our intention is to put all those profits back into the provides its foundation.
And it was a pretty substantial amount of profits. So I think actually we're gonna do some good with it going forward, but we haven't I hadn't fully thought through the the perception of it and but we made some money and we're going to spend it for a good cost.
Your next question comes from Nick Yulico with Scotiabank. Your line is open.
Hi, This is summit for Nick just a quick question onshore and leasing and and lease terminations actually so lease terminations. One school small have almost doubled as a percent of revenue this quarter versus Q1 last year on buses the last quarter that is Q4.
2019, so just trying to understand besides the bad debt and all that just trying to understand what you're kind of what do you see dumbed down until markets.
That are see elevated levels of determination.
Any any color would be useful.
Yeah. This is Tom summit on that lease termination, there's nothing unique their episodic.
And what we saw in Q1 was.
Not particularly unusual it was just related to a tenets of tenants needs and we help them out in another space as well.
There were a couple of like that so the its episodic <unk>, there's no trending that we see with termination fees being a foreshadowing.
Any other type of activity well I just don't see it.
So the only thing I would add to Tom's answer is that it's a billion square foot portfolio and in our business. Unlike the office business, there's not a lot of lease termination fee anyway. So it's one of those things were very small number could have increased by a large percentage and it's still a very small number and those things move around but there.
Specific decisions keep in mind, we have 15% spread to market and that's spread if anything it's still there and maybe has expanded the little bit so sometimes the lease terminations or an opportunity for us to make some money on on buying ADVATE tenant and actually makes them more money by releasing the space. So.
A lease terminations are not necessarily bad in our business and their minuscule in the scale of the portfolio.
And I apologize if we don't remember every single one of them Oh, we have over 8000 leases.
Your next question comes from Ki bin Kim with Suntrust. Your line is open.
Thanks, Good morning.
So first question can you just talk about your risk to your exposure to at risk, Tennessee or industry.
The second to thinking that step back if I put your comments about rent spreads that market rents being flat I'm, putting it all together.
Yeah, it's kinda seems a little bit optimistic given what's going on I'm on the macro funds. So you know what am I missing from.
From your views is it really does kind of tenant by tenant leasing that you're doing that gives you confidence than that or something else.
Well first of all I don't think I gave you a forecast for market rent a I was very careful tell you I. Let me tell you actually what has happened and I distinguish between the activity in January and February which was up 1% compared to our expectations versus March that was up 2%, but our forecast.
The only incorporate the rents going up we basically push that out well for the balance for this year and as you add somebody else boat pointed out we haven't issued guidance for next year, but we do think there's going to be a snap back next year. That's going to result in rent growth. If you were going to ask me right now it's not a fully baked idea so.
And our official view on rent growth is that it's flat for the year and we've already had some rent growth. So you can think of it as a slight decline or something but we're not smart enough to to be able to forecast those things with precision. The good news is that market rent growth has varied.
A little to do with our numbers in the near future. We have only 8% of the space that rolls over and we have a 15% mark to market and a greater amount on the ones that roll over this year. So really what drives rent ran a and operating results is the mark to market and the small percentage of roll up.
So I don't think it's going to it's gonna be big deal.
Your next question comes from Eric Frankel with Green Street Advisors. Your line is open.
Thank you just two quick questions do you have an economic forecasts that hope that a underlines your your operating guidance. This year and then just regarding kind of the safety stock safety stock in industry and a inventory resilient theme.
Have you talk with any cost burden specific industries that are brought this up or is it just kind of your assumption just based on your your experience and where you're at warrior internal data and I. Thank you.
Eric honestly I'm really surprised with your question have we talked to any customers that that just really blows me away [laughter].
We we are very customer centric, we do we have a chief customer officer, who in addition, as part of the executive team, who spent all its time and a dedicated team or talking to our major customers and we have over 500 customer facing people in that field.
That are in constant dialogue with our customers. So yes, we do speak to our customers quite a bit as to economic forecasts I don't spend a lot of time looking at economic forecast because I've seen much smarter than people then flow lodges have forecasts that are down 5% a year and some that have down 40.
So this year. So I don't know what it is I just look at customer behavior, when we forecast our business and yes in the long term our business, it's completely correlated with a with the consumption, which is highly correlated with the economic growth or decline, but in the short term the dynamics of eat.
Commerce to stay at home economy, and the need to carrying more inventory overwhelm those kinds of longer term considerations.
Your next question comes from Michael Carroll with RBC capital markets. Your line is open.
Yeah. Thanks, I was hoping you can provide some more color on the rent deferments. The 33 days of average rent that that is being deferred on on those specific tenants.
Is that enough for them to survive. This type of market turmoil I mean, I mean, assuming you've done that type of analysis and they've got the second part what percentage of these skus smaller tenants qualify for the stimulus package and does that give you more confidence that you're going to be able to collect fees deferments by the end of year.
[noise] Hey, Mike.
Address that second question, yeah that there's a high percentage of our customers that weve <unk> interacting with and that we think will qualify for the stimulus and recede evidence of that already knew you asked we've had several examples where customers initially contacted us only to call is two weeks later and say hey look the stimulus kicked in.
So you know maybe a little bit of a wait and see but we expect a high percentage of those customers receiving that.
Ah that activity and then with respect to the 33 days again, if somebody mentioned.
We know our customers very well we've had a very thorough process, we looked at their financials, we they filled out the questionnaires and that's been our best estimate of what's going to be necessary to to bridge them to the out to the next opportunity for them. So that's where we are.
Yeah, you're not kind as to the last question [laughter] you know a as you heard than our update call and I think you heard somewhere today about 20% to 25% of our customer base at some point has had a discussion.
With respect to some kinda rent differ or not of course on those we granted it very small portion of it Oh, we expect to ultimately maybe Grand 30%. Then today is more like 5%, but but so that alone means we've had direct discussion with 25% customer base well on a go.
In square foot portfolio, that's 250 million square feet. So we've had.
Conversations or multiple sizes of many many big companies in the sector with our customers just the bad that topic. During this period of time. So yeah, we're really talking to customers all the time.
Your next question comes from John Guy need with Stifel. Your line is open.
Great. Thank you I might have ups Miss this in a high did just tell me, but I was.
Yeah, I don't think you mention anything about near shoring or on shoring as a effect on your business.
And then second Tom It looks to me like a.
Back to the envelope a your midpoint of your guidance is a pretty strong around 85 cents 87 cents 89 cents can you talk a little bit about how Ah GAAP accounting plays into your rent deferrals.
Yeah, the on the Ontario, So most of this stuff is going to get onshore.
From China to and possibly from Mexico to the U.S.
At least with respect to the U.S. and with respect to Europe I don't think that much is going to change, it's probably going to be a China shifting.
Two European production, so and as you know.
Our Chinese strategy first of all its a very very small part of our portfolio its about a 1.5% of our income.
Is in China, and secondly, it's totally focus towards domestic consumption, we learnt great quickly that the export business doesn't generate a lot of industrial demand because containers are the warehouse so to the extent that there's more onshoring in the consumption markets, the U.S. and Europe.
I'm not counting on it but by definition, that's incremental demand on top of the consumption demand. So.
It should help on the margin and the reason, we haven't really factored in it.
Is that those are likely to go to really lower cost locations and we're real estate that cheap and labor is cheap and we are really well positioned for the for the infill large urban markets. So likely you're not going to put a you know plant so I'm sure in downtown San Francisco.
Or any place like that or L.A., you're going to go to a cheaper environment. So I think he will be a but.
Important positive for U.S. and European demand, but I'm not sure we because of our Jude geographies are gonna be the biggest beneficiaries of that I think people who are in a lot more remote locations will probably benefit from that Tom you want to take the other part of it definitely John <unk> Yeah. Your other question on the.
On the rent deferrals in the accounting analysis of that so the way restructuring our rent deferrals is extending the payment term and as we mentioned the payment term. We are due dates are within 2020, we certainly expected to be paid but we will the whole analysis on that list of Collectability when you book that right.
Revenue you deem that that revenue to be collectible and that's the assessment. So this is relating to April revenue.
Thats being deferred.
And you make the assessment in April as to the Collectability that <unk> revenue and.
You the book that revenue or you book, a reserve or a portion of reserve against that based on your assessment of Collectability and then regarding the ramping of or what is.
Or earnings look like from a quarterly perspective, clearly Q2 will be heavily influenced by the promote because that's when the bulk of that will land and then it's really a function of what we see quite frankly from a a bad debt experience.
As we said we've got a lot of bad debt reserve.
That's sitting there for the rest of the year and.
I think our results are going to move relative to.
What happens there.
Hey, the only thing I wanted to add John to that is that our prior to these adjustments downward adjustments our year over year growth a was on the order up I think 13, 14% FFO growth, 14% AFFO growth actually and that's a big number right. So it's come down.
On 4% so maybe another way of asking your question is how how come your guidance previously was so high and still is high and the reason for that is primarily that the volume of development starts in prior years that were just having a capitalize interest and then are now coming on and there are a lot of built to suits in dogs.
And those are now fully income producing so we had been in the denominator as a capital expenditures will we weren't earning a whole lot on up and as they stabilize and their lease that those extra earnings are coming online. So it had nothing to do with this change the environment. He was just hi to start with because of that.
And remains pretty healthy I mean, I think 10% growth year over year.
Even in the strongest that environment without increasing leverage.
Your next question comes from Dave Rodgers with Baird. Your line is open.
Yeah, maybe for Tom and I mean, just about asset values I know, Tom you talked about the promote I'm being consistent in the guidance and the reason why is the pricing at the end of the first quarter I guess I just wanted to drill on that if I could in the idea that you guys have taken market rents to more of a neutral stance. This year, you've taken a market that you can see outlook higher I guess, maybe why.
I wasn't that impact the valuation of assets is as you sit here in a very point in time and is there any risk to that promote and then maybe just a follow up to that gene you had said something earlier that the number of leases that you were doing I think was flat on a portfolio size adjusted basis did you give the square footage for those in our they smaller deals in the pipeline or or larger ones any.
Whether that'd be helpful as well thank you.
Yeah on D. appraisals, we what we've seen in the first quarter appraisals, but generally the numbers.
Our up very slightly by the appraiser, it's like one or 2% quarterly and appraisers have basically they currently appraisals you know as they normally do in markets with turmoil that talk about.
You know that there are no comps et cetera, et cetera, but but the real answer on that is that because promotes our such as sensitive calculation to that terminal value. These are generally three year promotes and if you move around a terminal value a little bit the promotes can move around we're gen.
Only very conservative in projecting and guiding promotes and we feel like we've got sufficient room.
To absorb any one any kind of the downside there the other thing I would say.
He is that more than half of the projected promote.
He is a hold back of the promote from three years ago, which and the amount of which was determined.
And calculated and is known and that number will not change you know so so a big portion of that number we know exactly what it is more than 50%. So to the extent. There's variability is on that last I would say, 40%, 60% or would this be.
Your next yeah, and their SEC <unk>, let me just answering the second part of the question which has.
Variance in the last 30 days, a leasing we haven't seen more leasing.
In a bigger size segments and will.
Happy to quantify that for you are right or wrong, but definitely there was customers.
Your next question comes from Derrick Johnson with Deutsche Bank. Your line is open.
Hi, Hi, everyone you covered a lot. So so let's do this some PLD has grown rapidly and I will say accretively over the past few years and in 2019 had additional large acquisitions. Meanwhile, investor sentiment has so far remain positive on industrial right.
However, I missed this serious pause and probable pending shake out what does it about the larger portfolio and positioning which makes you most optimistic on these uncertain times.
Well, we've had one and half of experience on the two latest acquisitions and last time, we talked about this couple of days ago, we were up about 5% on our underwriting of those portfolios based on activity that's already taken place.
So we feel really good about Oh sure you know Houston energy is worse than we thought and and Liberty had a pretty significant presence and in Houston, and we did too but again, it's a billion square foot portfolio and on the other hand, Pennsylvania has done a lot better than we thought previously because a lot of than New York.
Jason demand and the big boxes have.
For some strange reason you know picking up a lot of space in Pennsylvania. So that's looking better and that's actually a bigger portfolio. So net net all the reasons for which we did those investments that we articulated before stand and on top of bad there.
Just performed better than we expected. So that's a really good start I don't know whether that will continue for the next 10 years, but it's better to be 5% of had the game them behind again, when you when you're getting off the gloves.
I did that answer your question and let's give him an opportune das going again, because it was a complicated question. So.
We didnt answer it asking again.
Your next question comes from Manny Korchman with Citi. Your line is open.
Hey, Michael Bilerman here with Manny I was wondering if you can address a little bit on the capital deployment.
Well, what you've changed and you know looking at the press release, you brought down you or acquisition volumes, both building as well planned by <unk> billion in a quarter and commensurately you brought down your disposition volumes as well and you've obviously.
We had a big cut to the development side in terms of starts which obviously have capital commitments out in the future and I want to know two things one why not take advantage of the marketplace and continue to sell and build liquidity and continue to reshape the portfolio, which you've done.
The number of years to improve its quality and location. So why not sell more and then the second part is on the development side, where you've taken a much more conservative approach and ramped down your development. What are you seeing from industry at large in terms of development. So two separate sort of topics.
Somewhat connected up if you can address the great.
Great Michael I'm, a weird chicken and chicken live longer I mean, when the world is going are falling off the cliff and everybody's talking about you know can you GDP going down 40% this quarter or whatever we had some spec developments, we can start them anytime there entitle you know there they're ready to go.
And if we see the demand will start in two months later, we're not saying that that's our forecast, we're saying every quarter, we got to get in front of you guys and give you some.
Assessment of what we think is going to happen and this is a very turbulent time I think the fact that weve, even put out a guidance and by the way. We don't have an advantage of looking at all the other people in figuring out what they're doing to sort of Taylor on message. Accordingly, we're going fat first and we got to stick our netscout and we have.
And we've given a range, but we have taken a conservative approach, saying that we're not going to deploy any new capital on discretionary.
Starts off speculative projects and we're not going to buy anything at yesterdays price. It if prices become different for sure we're going to use our resources, we have over 10 $11 billion a capacity between the funds on the balance sheets, and we will certainly start those developments once there is leasing.
That we feel really comfortable about going forward, but we can't predict that there's no cost awaiting there's only upside in waiting. So we've covered the downside, we still well positioned for the outside and it's not intended to be a forecast. It's just the prudent thing to do a and I hope were wrong about that and we'll do closer to what we had.
I planned on doing before but like we're not gonna get over our skis.
Your next question comes from Jamie Feldman with Bank of America. Your line is open.
Great. Thank you I guess on the along the same line as a quick follow up and then a question one is.
You could just talking about when you do see occupancy bottoming in the portfolio. I know you guys said kind of towards year end things improving I'm curious more detailed.
Hi, how you see things treat you know what the trajectory is for occupancy.
And then bigger picture as you think about.
Potential cracks, obviously, there's a lot of cracks but.
Are you seeing distress among competitors or just universe is prior downturns that you've seen where do you think you know where is the most recent maybe people and thinking about.
Yeah, I think we will get a significant increase in occupancy the corridor or the quarter. After the vaccine is widely available.
Maybe even went into announced spend its definite that it's coming based on the anticipation of its something so.
Can you tell me again the date, then I'll tell you when that will be I from everything I hear it's kind of be more like a next summer ish.
Although there are some really positive developments.
That I've been hearing about from the scientific can meet the I mean, we've got couple a really big medical centers here and I'm in constant dialogue with them and on the therapeutic side. There's there's some really good stuff happening that we may even hear about in.
The August September timeframe. So I think that's one of the no occupancy is will turn around in terms of the cracks I would say.
As a.
As I guess Warren Buffett's, as though we'll find out who's been swimming naked as the tide receipts.
There are some people that have been mostly on the private side by the way I'm pretty.
Proud of my public rather on buying large theyre really behaved well throughout the cycle and I think everybody's kind of pretty disciplined them in the sector, but there's a couple of private players, particularly in.
Most of Europe, Central and Eastern Europe being a good example that you know have have really gotten out there on their skis and <unk>.
We'll see what happens maybe there are really good scare its but but I'm a you know, but I would say of all the cycles I've seen.
You know, whether it's the 87 collapse or they are SNL crisis or the dotcom or did you have to see I would say, there's less of that around much less about around than anyone of those are those cycles.
I think we are over our time allotment, so and we've taken away too much of your time this quarter to call. So let me. Thank you for your interest in the company and invite you to our next quarterly call and hopefully we'll all be.
Much more optimistic than we are in this environment and everyone stay healthy take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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