Q1 2020 Earnings Call
Ladies and gentlemen, good afternoon. Thank you for standing by and welcome to the Duke Realty first quarter earnings Conference call. At this time all lines ARNA listen only mode later will be an opportunity for your questions and destructions be given at that time, if you should have carnitas.
Since today. Please press star followed by the zero at an 18 T. operator will assist you just time, it's my pleasure to turn the conference over to our host Vice President Investor Relations Mr. Ron Hubbard. Please go ahead.
Thank you Tom Good afternoon, everyone and welcome to our first quarter earnings call.
Joining me today, or Jim Connor, Chairman and CEO, Mark to name Chief Financial Officer, Steve Scherger, Chief operating officer.
Anthony our Chief investment Officer, Mark on the Bell Chief Accounting Officer.
Before we make our prepared remarks today, let me remind you that statements, we make our subject to certain risks and uncertainties that could cause actual results to differ materially from expectations for more information about those risk factors.
In a framework December 31, 29 to 10-K than we have on file with the FCC.
Now for prepared statements I will turn it over to Jim Connor.
Thanks, Ron and good afternoon, everyone first on behalf of all of our associates. We hope all of you and your families are safe and well.
Our prepared remarks today are a little longer than normal, which we believe is appropriate given the market volatility.
Considering that will not be meeting in person.
We're going to provide more detail on our first quarter results, what we're seeing in the markets at our re projected guidance for the balance of the year.
My opening remarks, I'll comment on three topics our initial response to pandemic.
First quarter highlights.
Well the leadership team is managing today's challenging operating environment that alternate along turn it over to the balance of our chief.
First I'd like to thank the Duke Realty team around the country or demonstrating great resilience and adaptability amidst the global pandemic. Thanks to our standard the our technology and previous business interruption planning steps, we have seamlessly transitioned the telecommuting.
We are continuing to collaborate and execute on all facets of our operational and financial functions. This includes steps to ensure everyone safety and health in line with CDC in various government guidelines no one from the Duke Realty team has contracted the cobot virus and all of our team continues to perform at a high level.
While this challenge the challenges of the spending.
Turning to a few operational and financial highlights for the quarter, we achieved 33% rent growth in our second generation lease.
We signed 4 million square feet of leases.
We started three developments totaling $117 billion, all 100% Preleased.
We bolstered our balance sheet with an unsecured note issuance that was refinance we now have no significant debt maturities until the fourth quarter of 2022.
Now, let me highlight the focus areas our leadership team as we manage through the current operating environment.
We clearly cannot predict the timing more than just for the coming cycles, but by covering the following areas, we do get a sense of direction and potential magnitude of our change within our business.
First we are actively in dialogue with all of our existing customers for operational issues pertaining to the Covance safety protocols.
And or four collection of rent and in certain situations potentially entering into a rent deferral plant.
Second for our development pipeline, we're very focused on maintaining worker safety, maintaining project delivery schedules and project budgets and Mitch any government mandated safety protocols and shutdowns, Steve Shneur will speak more in depth on this and just a moment.
Third on major capital deployment, we've decided to temporarily halt any new speculative development starts acquisitions or dispositions.
We have more clarity around the timing and impact of the post Kobin world market lay out more specifics on 2020 expectations in just a few minutes.
Fourth we are implementing cost savings measures to help manage to get a depending on the length of the shutdown of the pace of the economic recovery.
Fast we're focused on monthly performance trends and modeling expected cash flow scenarios and the underwriting team is providing more frequent tenant credit updates.
Six we're closely monitoring supply and demand trends in each of our 20 markets both for the near term and looking forward into 2021.
Finally, the executive team is meeting weekly and sometimes daily to lead and communicate a road map to our organization as well as our board of directors.
Now, let me turn it over to Steve to cover the operational side.
Thanks, Jim I'll first cover overall market fundamentals and I'll review, our operational results and finally touched on the topic of rent collections.
The quarter ended up relatively strong in the demand front, given the lack of availability of space.
And with decision, making starting to slow in early March market achieved about 35 million square feet of absorption.
Deliveries were about 55 million square feet equating to a mid 4% vacancy rate at quarter end [noise].
As you'd expect the outlook for demand until 2020, there's going to decline from the slowing economy.
Well, it's too difficult at this time to predict a range of demand given the leasing trends we've seen in the second half of March and through April today, we are seeing demand from important industries, such as food and beverage healthcare reverse logistics and other basic necessities.
Of course, the direct to consumer E commerce type of demand.
What the exact demand offset will be from customer vacating space is not yet clear and I think we'll know a bit more as we get into May and June on this topic.
If we assume the stress scenario of little to no new demand and completing the under construction pipeline in the market today.
Of about 140 million square feet, we'd probably be looking at a vacancy rate of 5.3 to maybe an upper bound to 5.8% in the first half of 2021.
However, we believe given this new era of social distancing and more stay at home activities and with the potential aboard inventory resiliency State safety stock planning later this year.
The tend the demand for incremental inventory storage and direct fulfillments that space should stay fairly solid I will likely increase into 2021, what we see an economic recovery.
I'd also note that we as well as all of our public peers over reported to date have pulled back on new speculative development starts. So I think it is likely we will see a significant decrease in deliveries going forward and therefore, a fairly balanced supply demand equation in 2021.
Turning to our own portfolio, even with the market starting to soften in mid March we still executed a very solid first quarter by signing 4 million square feet of leases.
This is higher than the first quarter of 2019.
Only half of this activity was in March. It included included in the 4 million were 850000 square feet of short term leases, which is consistent with our past performance in short term leasing activity.
Thus far in April we have executed 1.9 million square feet of new leases.
These leases include a long term lease for 200000 feet Nashville, with a tenant who have signed a short term deal in the first quarter.
650000 foot early renewal in northern California, a 450000 foot renewal and Columbus, and a 300000 square foot transaction across two properties and Raleigh.
You can see by these deals demand currently a stronger across larger spaces and the average lease term for our first quarter lease transactions was 6.7 years.
When considering renewals and immediate Backfills, we released 79.2% of our expirations during the first quarter and closed the quarter with an in service occupancy level of 96.5%.
The lease activity for the quarter combined with strong fundamentals led to another great result, and rent growth as Jim mentioned of 17% cash and 33% on a GAAP basis.
The mark to market in our portfolio of leases about this about 15% pre pandemic rental rates.
In addition, we have only 5% of our leases expiring in 2029% in 2021. These low expirations, coupled with mark the mark to market estimates support they likely lower level of volatility and net operating income compared to other companies was with much greater levels of annual lease explorations.
Now I'll cover our recent rent collection performance.
As of this morning, we collected 100% of both our January and February rats, 99.6% of our March rats and over 97% now of our originally built April reps.
I'd also add that we have collected about 22% of our may rents today.
We have a detailed process. We go through if we get a request from the from a tenant for a deferral.
First we encourage the customer to look at all available liquidity sources, such as their bank facilities in any government lending programs next we provide each tenant with a checklist request in their financial statements.
Evidenced that they have applied for one of the government lending programs have been qualified.
And what other measures, they're taking to reduce cost and improve their operating performance.
We then perform an updated credit review process and assess the staying power of the customer.
At that time will conclude on the decision whether to offer some type of deferral.
Although it's still early in this process. We generally see these agreements resulted in a two to three months a partial base rent deferral.
With the deferred amounts to be paid back with interest generally within six to 12 months.
As we reported in our press release last night, we have received requests for rent deferrals from about 24% of our database.
It is important to note that only a portion of these are being considered at this time as.
I'd like Ed.
Our smaller tenants are definitely stealing the impacts of this environment more acutely as evidenced by the fact that majority of our request of come from tenants under 100000 feet.
I would also add that up to 5 million square feet leasing we have done to date. When you exclude short term leases only 16% of this activities from tenants less than 100000 feet.
Until there's more clarity on the length of the Covance shelves in place government orders and development of Cowen treatments, the near term as a bit on certain regarding the outcome of rent deferrals going forward and as Jim alluded to in his opening remarks, well maintain active dialogue with our customers. We're focused on maximizing our monthly run collections.
Let me also point out that we feel we have a very strong customer base, including our top tenants such as Amazon.
Yes target home depot, Walmart Clorox, and Samsung just to name a few coupled with our relatively longer lease terms on lower rollover. It is our view that this has been an underappreciated aspect of Duke Realty is risk reward equity proposition.
For those investors over the long term horizon.
We also had a strong quarter of development starts as Jim mentioned in spite of the growing uncertainty.
Broke ground on three build to suit projects totaling $117 million, all 100% leased our development pipeline at quarter end totaled $1.1 billion was 74% of these assets allocated to coastal tier one markets. This pipeline was also 61% Preleased at March 31.
Regarding the timing and delivery.
Various government actions to close out certain businesses deemed non essential we've had two of our 21 projects and incur some sort of work stoppage with one of them now back on line, we expect a minor completion delay on only one project and only by about two to three months as that project will now be back online next week.
At the project site level, we've been actively engaging with contractors and prospective tenants and the new project in project teams of doing a fantastic job of minimizing the impacts not or have any material issues from tenants viewpoints.
It seems everyone knows run this together, we're open for business and working hard to complete all of our facilities.
As of last month, we temporarily suspended all new speculative development starts as is reflected in our updated guidance future spec development will depend upon the business environment and the economic outlook for the second half of 2020.
We do however, having solid pipeline of potential build to suit projects will creditworthy customers.
We expect would be an accretive allocation of capital going forward.
As far as acquisitions and dispositions, we had a light quarter of activity. We closed on the sale of a 540000 square foot building, 100% leased in Saint Louis as you expect.
We've reduced our guidance for dispositions, which mark will touch on however, we do have a number of good quality assets that we're still expecting to sell later this year subject to improving market conditions.
Our disposition activity will continue to contribute toward or 70% tier one geographic exposure objective by the end of 21 as well as provide a source of funds.
We've also reduced expectations on the acquisition side, we hope to find some opportunistic transactions in light of the market turbulence and have the balance sheet and industry connections to react quickly to take advantage of any opportunities that we see.
I'll now turn it over to Mark to discuss our financial results and guidance update.
Thanks, Steve Good afternoon, everyone.
Core FFO for the quarter was 33 cents per share compared to quarter as a follow up 38 cents per share in the fourth quarter 2019.
Core ethanol was negatively impacted by an approximate three cents per share increase to noncash general and administrative expense compared to the fourth quarter of 2019, which is a normal first quarter item, resulting from the accounting requirement to immediately expense a significant portion of our annual stock base.
Compensation ran core FFO was also negatively impacted by almost two cents per share.
Straight line rents receivable Collectability reserves, we recognize this quarter for the impact of the totaling 19 outbreak.
Improved operating performance from restaurants, and increased occupancy largely offset these collectability reserves, resulting in core AFFO per share of 33 cents per diluted share and system with the first quarter 2019.
We reported FFO as defined by nearly 20 cents per share from the quarter compared to 33 cents per share from the first quarter 2019 decrease resulting from an approximate five cents per share loss on debt extinguishment costs from the refinancing transaction, we executed during the quarter.
Yes, a phone totaled $126 million from the quarter compared to $119 million from the first quarter 2019.
FFO during the quarter was not impacted by the streamline collectability reserves, we recognized during the quarter.
Same property NOI growth on a cash basis for the three months ended March 31, 20, 26.6%. In addition to increased occupancy and rent growth same property NOI growth. This quarter benefited about 180 basis points from the burn off of free rent compared the first quarter 2019 same.
Property NOI from the first quarter earnings GAAP basis was 1.5%, which was lower than the cash number due mainly to a 300 basis point impact from a noncash collectability reserves recognize this quarter as well as the lack of impact from free rent burn off on a GAAP basis.
I want to discuss our strong liquidity position and point out that we added a new schedule in our supplemental materials on page 20 as illustrated in the schedule, we expect to funds available for reinvestment.
More than sufficient liquidity to fund our operations, including the completion of our development pipeline and pay dividends. This is true even when considering the impact of cash collections from the various forms of rent relief that we may extend to certain of our tenants over the next few months I'd like to talk a little bit about the accounting impact of rent.
Charles on various metrics and liquidity.
As long as rent deferral agreements are deemed to be collectible, there's really no accounting impact on FFO and AFFO or in Hawaii to the extent any of the repayment terms stretch beyond one year and there could be an immaterial negative impact in short term FFO and NOI offset by positive variances in future.
For years, but no impact on AFFO.
To the extent any rent deferral agreements are deemed to be uncollectible and they will be included in our reserves for bad debt and obviously impact all these metrics.
From a cash flow liquidity perspective.
The negative impact on short term cash flows and not in any way, we'll be materially in will it materially affect our overall liquidity position. Let me give you. An example to show you. The magnitude of cash flows were talking about our monthly gross shrimp billings are approximately $70 million, if you assume or deferral requests requests.
From 25% of our annual net lease value and we end up branding relief on even half of those requests that would be 12% of our tenants on an annual gross lease value or $8.8 million monthly gross rent.
If you then assumed that all of the granted requests for from three months some relief at 50% gross rents each month.
$30 million total released over three months. This is about 150 basis points of annual revenue revenue.
Our quarterly run rate of assets sold less dividends is approximately $40 million. So even at this level deferrals and my example, totaling $13 million, we have ample liquidity even during these periods and deferral to cover all aspects of our operations and our dividend also we do expect repayment of these deferrals. This does not equate to law.
Revenue for cash flow.
From a capital standpoint, we executed and transaction prior to the comment outbreak, which ended up putting us in an even more secure position to weather. The crisis. In February 2020, we issued $325 million, a 30 year unsecured notes at a coupon rate of 3.05% and use the proceeds from the.
Early redemption of $300 million of unsecured notes that more interest any 4.3% coupon rate and we're set to mature in June 2022.
As a result of this transaction, we do not have any significant debt maturities until October 2022.
Wells Fargo's credit research team recently published report on liquidity and based on various stress test to EBITDA and their year end projected credit metrics, we rank the strongest out of 63 reach covered in her remarks.
Lastly, which is what is not included in these liquidity metrics is it virtually 100% of our properties are unencumbered and a very high institutional quality. This provides another reliable source of funds such ever need.
Our leverage metrics are very conservative with net debt to EBITDA at 4.8 times and a trailing 12 month fixed charge coverage ratio 5.2 times.
I would now like to address the changes to our 2020 guidance Matron result, pandemics impact on the economy in supply chain.
We decreased our guidance for core FFO to a range of $1.41 to $1.51 per diluted share from the previous range, a $1.48 to $1.54 per diluted share, which equates to a five cents decreases of endpoint.
The decrease guidance for core FFO is driven by a midpoint estimated increased $18 million or five cents per share of Collectability research or loss trends from defaults and delayed leasing assumptions, including the $5 million charge taken in the first quarter.
This equates to a total increase in 210 basis points I want to be clear and that this 210 basis point increase in revenue researchers. If you will is not all bad debt is all inclusive of cash bad debt straight line bad debt lost occupancy from default and delayed lease up assumptions from curve.
Only vacant space is this estimated additional loss of revenue of $18 million were 210 basis points is ultimately correct split between the categories and I just mentioned could during widely based on timing and tenant makeup.
But as of now we are estimating 210 basis points increase will be made up of 80 basis points of cash from a combination of default and bad debt write offs 60 basis points from increased straight line reserves, which was already booked in the first quarter and 70 basis points from delayed Lisa.
Assumptions.
This is in addition to the 50 basis points of annual revenue, we had in our original guidance. So at the midpoint, we now have 260 basis points or $22 million total revenue reserves.
I also want to point out that these numbers do not necessarily translate to same property results.
That reserves on straight line receivables do not impact cash same property results and much of our decreased occupancy assumptions in currently vacant space is in properties that are not part of the same property full thus the total impact on same property is only 150 basis points.
We tried to take a reasonably conservative approach in coming up with our estimated potential lost revenue given the unprecedented times. We are facing we looked at our overall potential risks risk exposure from many different ways, including individual tenant concerns were present.
Exposure to various industries experiencing greener pressures in this environment and exposure is smaller tenants and we'll have a tougher time withstanding the shutdowns from prolonged period of time.
We increased our straight line receivable reserve of $5 million, we took in the first quarter is the accumulation of all these review reviews.
Expected our total straight line receivable balance at the end of 2019 was about $130 million nanometer $7 million reserve at that time. So we increased that $7 million reserve by this $5 million as I'm sure. You can appreciate this is a very difficult process given the extreme degree of uncertainty.
And the present time, but we thought it was prudent to take this approach and made sense to increase our reserve at this time given the extreme changes we've been experiencing since year end keep in mind. Our average remaining lease term is 5.9 years. So on average data in a period of time it takes to clean to collect the straight line receivable balance.
For perspective in 2009 are in our industrial portfolio experienced 210 basis points of bad debt expense about half of that was straight line receivable write offs and the other half of write offs billed receivables. In addition to this 210 basis points and bad debt, we had 150 basis point.
Earnings of loss trend on annualized basis from vacancy after tenant defaults. So in total we had 360 basis points of lost rent from just bad debts and defaults in 2009. This is not how we arrive at our estimates for this year, but merely for comparative purposes, we have a much stronger portfolio and tenant base now than we did.
Back then to come out as current situation much stronger in the long term.
Also negatively impacting our core FFO revised guidance, our increased carrying costs, resulting from our decrease in development expectations that would have otherwise been capitalized.
For similar reasons you core FFO. In addition to the loss on debt extinguishment. We took in the first quarter. We have also decreased our guidance for married FFO to a range of $1.32 to $1.44 per share from the previous range of $1.42 to $1.52 per share.
We're also revising our guidance from the change in adjusted funds from operations on a share adjusted basis to range between zero percent and an increase of 6.2% from the previous range of 3.1% to 7.7% as stated earlier a portion of these estimated bad debt charges that may negative.
The impact core FFO do not have any impact on AFFO, even with these revised expectations. Our current quarterly dividend rate of 23, and a half cents per share the durability of our dividend remain strong with coverage against adjusted funds from operations in the high Sixtys to low 70% range for same property NOI growth on a cash.
Cash basis, we have in decreased our guidance to a range of 1.75% to 3.25% from the previous range of 3.6% to 4.4% cash same property NOI growth for 2020 will be impacted positively by growth in rental rates on second generation leasing, yes offset by expected.
Collectability reserves on billed receivables and lost cash rent from a challenging economic conditions for a number of our tenants the bad debt expense from straight line rents will not impact same cash same property growth, but will impact GAAP same property. So the variance between cash same property growth and GAAP same property growth will be wider than nor.
At about 200 to 300 basis points as Steve noted, we have temporarily halted new spectrum development starts which was the primary driver turned down revised guidance for 2020 development starts which is now in a range of 275 million to $425 million compared to our original 2020 guidance of 600.
Only 5 million.
$275 million, we've also temporarily halted new acquisitions and dispositions.
Which were the primary drivers lowering our estimate for disposition volume $225 million 250 million from the original guidance of 300 million to $500 million.
Finally, we decreased our guidance for stabilized and service average occupancy.
To a range of 95% to 97% a decrease of 100 basis points from the original midpoint, while we've decreased our guidance for total and service average occupancy to a range of 94.4% to 96.4%, which is a decrease of 70 basis points from your equipment.
The monetary and impact of this expected occupancy decrease is included in the 2020 in the 22 million dollar or six cents per share of total revenue reserves I mentioned earlier.
Now I'll turn it back to Jim for a few closing remark.
Thanks, Mark we closed the first quarter 2020 in the midst of a global healthcare crisis, and an unprecedented economic downturn, which has fundamentally changed our outlook on 2020 compared to when we announced earnings guidance just three months ago.
However, as Mark just walk you through our revised guidance for the year the midpoint of our expectation supports positive year over year earnings growth. We believe this is a reflection on the merits of the durability of our corporate profile and business fundamentals and gives us confidence that our organization will successfully navigate through this challenging time period.
So I'll summarize our priorities in the near term.
We're prioritizing the health and safety of our team members.
Continuing to maximize portfolio net operating income.
Completing and leasing the development pipeline and delivering environmentally responsible facilities.
Taking our very strong balance sheet that comfortably supports our dividend and lastly, carefully allocating any new capital to best position ourselves for growth over the long term.
So with that we'll now open up our lives to the audience. Since we have got a little along with our introduction and comments I would ask that participants keep the dialogue to just one question and you of course are welcome to get back into queue, Tom will now take questions.
Ladies and gentleman on the phone lines. If you wish to ask a question. Please press one followed by the zero, you'll hear an acknowledgment that you've been placed in Q2 remover saw from Q simply press the one zero command again.
Once again for questions. Please press one zero. Thank you.
Our first question today comes from the line of Nick Yulico with Scotia Bank. Please go ahead Sir.
Hey, good morning cement again for Nick just a quick question on the bad debt and bad debt activity in Q1, I guess, what was the kind of denim and what type of speeds are we talking about in terms of.
Sizing and.
What what kind of industry affiliates in the tenant had and potentially if you could highlight market and in addition, how quickly. We are you able to release this speaks to the tenant.
We noticed that small amount concessions offered so was this related to the same situation and in terms of the income incoming tenant.
The new what's the industry affiliation there so just trying to get.
So who went out and what sort of industry, and then who came in and what sort of industry.
Yes, I'll take that there really is no. There's no loss attendance. This was not a cash reserve it's all straight line.
So it's not like we lost occupancy and we're waiting to backfill the space that's not what we're doing what we took a very comprehensive review effectively of every tenant in our database and we looked at it a lot in different ways, we looked at.
Tenants that may have.
The visual.
Bad.
News News recently, that's not favorable forum, we looked at.
All the Tennessee I haven't paid is April rent.
Which are a lot of small tenants as Steve mentioned, most of our deferral requests and it tends to have a paid is right yet our small tenants in nature. So we sort of current all those tense together and we put up any reserve for the bad debt on the straight line piece.
We looked at tenants and higher risk industries that are more heavily impacted by covered right now those industry be industries like automotive unrelated airlines hospitality travel planning recreation in total those industries. Our exposure is really only about 5%, but we did put up a reserve on that.
Of tenants.
Straight line receivable balance so you got to keep in mind to streamline receivable balances a $130 million on our balance sheet, it's been built up over time.
Through free rent, sometimes years ago that was given some of these tenants rent escalators. So it's not just it's not about current cash rent since about straight line revenue that weve recognized in past years, we reserved for in the first quarter. So it's not a occupancy issue is not likely loss tenants.
As Steve mentioned, our cash and we're collecting has very good right now we just thought at this point in time, given everything going on the world.
We were comfortable with the reserve on that $130 million at year end, given everything going on the world and seem prudent we ought to be increasing that reserve right now.
Mark I mean.
Sorry, if I misunderstood, but wasn't backfill.
In the quarter.
I'm not asking too.
Well, let's say, we renewed about 79% when you include Backfills and seven tenants that expired.
Represented about 11% of the 79, yes, that's not that nothing to do it the bad debt. We took that just we had okay. Yes.
That nothing to do.
Yes, okay.
Our next question comes from Mike Mueller. Please go ahead.
Yes, hi.
Quick question on the 250 basis point occupancy declined baked into the second half the year.
Are you assuming that all takes place on July one or where the slope lead throughout the second half the year, just asking because I'm trying to think about the 2021 carryover.
Yeah, Mike, we didnt necessarily get that way. It has an average number so I guess on average you can really kind of think of it like a happens on July July one reality is it will probably start slowly happened before then.
And then increase you know probably early in the second half of the year, but on average I think on July one is kind of the way we modeled it right now.
Got it okay. Thank you.
And we have a question from Jamie felt feldman.
Presenting bank of America. Please go ahead.
Mr. Feldman would you please press the command again.
One zero.
Oh, Okay. Your line is now open.
Greg can you hear me.
Yes, we are generally very Jeremy thanks.
I wanted to go back to Steve's comments on.
Inventory or inventory restocking and just kind of what tenants are thinking over the long term can you guys maybe quantify what your average tenant is thinking in terms of the incremental demand picture when we do get through this and thinking a little bit back to normal just trying to kind of get a sense of what with the world does look like in a year. So.
Sure Jamie.
I guess ill make two points one is.
Probably no other time than than the last 30 days that we had more access and conversations with our customer base than we do today.
We're talking to every one of our customers and having conversations from the CEO down in real estate directors.
Secondly, I think theres been a lot of talk on resiliency and safety stock.
A lot of its been anecdotal.
Our customers are beginning to talk about that I can't say that right now we have specifics on.
What that percentage of increase in inventories going to be aware, where that's heavier is going to affect we don't have any specifics on that yet so Jamie I would add this is part of the larger discussion, which is that ongoing and I think is going to accelerate which goes all the way back to the onshoring of jobs and manufacturing.
At Assembly that has been talked about for the last couple of years. So I think you will see many companies begin to put plans in place over the next couple of years to continue to bring more of that.
Responsibility back into the us and more that inventory into their existing supply chain here in the U.S. So they can access quicker.
Okay, I mean, we like what percentage of your tenant base would you say.
During that.
Talking about that.
Probably 25% of that we've talked to so far.
Okay all right. Thank you.
Evolving situation Jamie.
All right.
Next we'll go to line of Jeremy Metz, representing BMO. Please go ahead.
Hey, Frank I'd say.
Mark you ran through a lot of great math on the in better protection and tap.
Your next year April collection growth strong.
We expect a grand a token Andy deferral requests year.
The 200 million on the line to boost your cash position I get the idea you're building a little bit of protection I'm wondering if you could just give us a little color.
Along those same line doesn't have to be at Robert if the right, but just color on that rainy day parts here utilitarian here to decide.
That that was an appropriate amount of cushion.
Yes.
Thanks, Yes sure Jeremy.
Well a couple of things I would say number one when we borrowed that money.
We knew that would get us comfortably through this year and well into next year funding everything we have in front of us, including our development pipeline. If there were no other capital sources available.
That was in kind of mid to late March that's at a time, where companies were not accessing the debt markets and the companies that were accessing the debt markets were a rated companies with interest rates on 10 your money it pushed down 6%. So that's when we did it would we do it today I'm not sure we're comfortable with.
Cash as we sit here now we're going to slowly burned through that and fund our development certainly the capital markets are available to us and our open.
We believe we can do tenure money now well below 3%.
So I don't know that it will be on our balance sheet for the long term, but I just I think it's important to keep perspective on when we did not just that it's sitting there right now.
Thanks, Mike.
Our next question is from Blaine Heck with Wells Fargo. Please go ahead.
Great. Thanks, good afternoon.
Tim or Steve I know, that's probably at a really tough question to give a definitive answer to this point, but how do you think this crisis ultimately effects rent growth nationally. This year I think people were probably expecting some something like mid single digit rent growth Creek hope. It is that now full apps or do you think it turns out.
Negative in the near term and do you think that differs with respect to different building sizes or any specific markets to the positive or negative.
Yep blame.
I'll answer the question, Jim will chime in if share if he disagrees with base. So I will tell you chime in and cut off in the first in the first quarter I I think we were very pleased with with our.
Our success the first quarter.
I do think it's a it's a fluid situation I think it varies by Submarket as we've highlighted in the past.
We do not have a lot of rollover in our portfolio, which I think we've used as a very positive thing right now.
But I think in the rollover, we have will still do very well on the rent growth.
I think some of the softer markets we've outlined in the past.
Submarkets in particular will probably experienced some some flat if not negative rent growth.
Houston would be one area that I'd point out as a pretty soft market right now but.
I think at the end of the day, our our metrics on the volume of leasing we do throughout the year, what we're pretty happy with.
Yes.
It is I think our confidence.
Continued positive rent growth is reflected on our revised guidance. If we thought the world was going to seriously deteriorate to where we were negative in the second half a year I think you see our numbers at or below zero and they're not so I think that gives you a pretty good.
Understanding of what we think we're going to be able to achieve for the best year.
And then.
Theres, a number of scenarios out there, but as Steve alluded to earlier.
The new specs supply has virtually ground to a halt and thank goodness, everybody still remembers 2008 and was able to turn off the spigot pretty quickly. So what's the 140 million that's under construction gets delivered.
That's virtually is so 2021 isn't going to look nearly as bad as I think a lot of people as originally thought because theres still is demand out there and there's no new supply coming in behind that so you could see some reasonable scenarios with just modest demand in the second half of the year, where 2021 is very balanced in very high.
Yeah.
Very helpful. Thanks.
We have a question from the line of Dave Rodgers with Baird. Please go ahead.
Repaired, we can literally all of them.
Third as go ahead.
Can you guys hear me.
We can.
But that I.
I guess on development I don't know how much of the question you heard but you cancel the couple deals are walked away. It looked like maybe in the quarter of a couple of land parcels, but you did talk about some really good demand on the build to suit side. So I guess, maybe some additional thoughts would be helpful around build to suits in terms of where you think yields go in light of your just your comments you made to the last question.
Is there a cap on how much you're willing to do on the build to suit side. If you can really accelerate that and then those land parcels as well thanks.
Well I think Stephen I'll Tag team this I'll start off.
We did walk away from folks three fairly large land sites and in the first quarter.
Our total write off there was something in the range of about $4.8 billion.
And well that's a lot of money to walk away from you have to remember that.
The overall purchase price for those three parcels was 54 million.
And the cost of go vertical on those three sites was another 88 million I believe so.
Given that we suspended speculative development, we didnt have build to suits pending on any of those we thought that was prudent because we've got as you saw.
Plenty of land in our current inventory.
It's a tidal there we're working our way through the entitlement process to meet that build to suit demand.
We do have some land in the budget for purchase throughout the remainder of the year, but we just thoughts proved to step away from those Steve you can add some more color Dave I'll, just add that I think on the build to suit side I think you'll see us do as many of those as we can as we can get with with good credit customers.
Our pipeline on build to suits you I've talked about this in the past that's a that's.
A metric that we try to track pretty closely because we think its.
In an indication of the health of.
The environment and our customers.
Pipeline for us is probably down about 30% today over what it was maybe 45 to 60 days ago.
But it's still pretty healthy and it's it's E commerce food and beverage.
Household supplies some consumer goods. So we're active in that I think thats. That's that's a piece of our business that we're we're hopeful as the year goes on that that we're able to to outperform on.
And the other part of that was just any change in yield.
Or expectations, our construction costs.
No I wouldn't I don't I don't think so I mean, there's been some discussion I covered my comments about.
Some work stoppages in different areas that seems for the most part to be behind us.
And I don't see any increase in cost and I think I think we'll see competition like we always do.
But we've got some we've got some good assets. Some good land sites and I think our yields will be consistent with what we've done in the past in our margins.
Great. Thank you.
Next is a question from Manny Korchman with Citi. Please go ahead.
Hey, good afternoon, everyone.
Let me follow the last couple of questions in terms of credit psychology, with fewer spec sites out there and you when peers talk more about both the suit you think the tenants sort of.
Got it or what does it take them to understand that they want to be in the building. They now have to go and track down the developer and do that committed broken suit, that's six to nine or 12 months out rather than shop around in a market once those spaces are available.
I had many I think it I think it's a little early to to make the call in terms of of how people have really fundamentally changed their outlook.
We still have 6 million square feet, a first generation space available in our portfolio and.
Many of our peers do as well so I think what you've got as a situation as Steve alluded to a number of these users who are looking at what we're going through today as a short term scenario that this is not going to affect their longer term business or if it is it's going to affected in the case of E com.
Yes, or food and beverage is going to effective positive way.
They're choosing to go the build to suit routes so that they could get exactly what they want where they want when they want it and as you know many of these ecommerce facilities and many of the food beverage facilities are substantially different than your traditional.
Off the shelf spec building. So that's why although Steve said demand is down we've still got a pretty good pipeline and I think we've always said that's a real indication of.
The outlook than our major clients are taking for the next 12 to 24 months and I think a lot of companies believe we'll work our way through this in the short term and in 2021 in 2022 will all obviously been a better place they need have facilities for that business.
Thanks.
And we'll go to rich Anderson's line with NBC. Please go ahead.
Good afternoon.
So I go back and listen to Mark's comment that don't have my courts Naga for here with me, but.
Yes.
What I did.
Catch was you know that 210 basis points.
60 basis points of that taken the first quarter I know noncash.
Reserve for straight line rent.
But that was a kind of a pre cove, it or sort of preliminary cove, it sort of exercise and I'm curious.
What gives you the confidence that that will stand the test of time as we go forward.
And also in light of the fact that you know the 210 basis points and guidance today.
Compares to 360 from 2019, it just feels like that that to 10 as a starting point to me and correct me if I'm wrong in thinking of it that way.
Well, maybe a little bit first of all rich there was no fun for me to reach six pages for its diners. So I apologize for that we thought it was important trying to get all that data out there is antelope Roush no problem.
So let me just a couple of things I would say.
The 210 basis points keep in mind I said 70 of that is really just delayed leaseup timing from currently.
Level space. So you take the 210 and it really drops down to 140 basis points, when you're talking about bad debt defaults, whatever you want to call that.
But I wouldn't I would say in a little definitely it was down 60 basis points of that that we already took in Q1 for streamline was not a pre coburn exercise.
This was done effectively from the end of March through like last week based on the current environment and everything going on in our world right now.
So a lot of the reserves that we took.
Most all of it are on tenants that are current under actual cash rents. Let's say this is the build up of several years of an asset on our balance sheet at $130 million from you know rent escalations in free rent back in a day and all that and as we look forward that $130 million Burns off.
For the remaining lease term all those tenants and on average our remaining lease terms 5.9 years, so kind of way we thought about it as we set here over the last month scrubbing. All those were like we got to look out over the next 5.9 years on average and think about are we going to get all of this $130 million back yet. So it was very much a post.
I would exercise they got booked at March 31.
Okay, and how would you sorry, just a follow up the 210 versus the 360 from last year in its totality does that make you wonder if you've done done enough of a have a dig I guess the bigger question.
What is your what is your expectation about.
Win win business starts to get back to business.
Underlying the thought.
No I forgot to answer your question, Yes. The 360 was 2009, Okay. Oh I thought you said 19, excuse me Oh, I'm, sorry, maybe I did it by Dan I'm sorry.
Hi.
My point is so thats as bad as it ever notwithstanding okay, Okay, and we have a much better portfolio at a much better tenant base. This time around new products that 2009 my bet. Thanks, very much yep no problem.
And next question from Kevin Kim with Suntrust. Please go ahead.
Thanks.
The 250 basis point occupancy decline for the second half how much of that is tied to pick tenant.
First is general Conservativeness that you're taking.
Kevin very little I would say is tied to specific tenants.
Like on a one off basis, but what it is tied to like I said, we kind of tried to match up the occupancy piece with the dollar piece. If you will so when we looked at like some of these more troubled industries and we put up.
A generic or a general reserve on a portion of that so I mentioned like automotive airlines hospitality travel planning all that.
We really put it up for that.
Population of tenants. If you will there were a few tenants here in there but for the most part it was more around industries and groups of tenants like the smaller tenants. This still Lois April rent. It was done more in that vein and it was one off tenants there were a few tenants one off but not many.
Okay.
If I guess with a quick second question here.
What is the risk that some of the DNA tied to your development that is currently capitalize and some of his offset because you're doing third party development that you call General contractor service revenue.
So what's the risk that DNA that's capitalized.
On to the income statement.
Yes, so I mean, thats, we did not revise our gionee guidance and we factored that in.
So what you really have is you have to offsetting things happen, we're reducing overhead costs, we're reducing our overall costs. Some of thats very easy, it's easy to reduced travel and entertainment costs right now.
And that's a big part of what we do so reducing travel costs, reducing some compensation costs revised metrics were add bonuses won't be the same this year's last year. So we're reducing our over all pools costs and offsetting that decrease is a decrease in the absorption we're going to half from decreased development and that's why we.
Left our Gionee flat as you've got two things offsetting each other.
Okay. Thank you.
We have a question from the line of Michael Carroll, representing RBC capital. Please go ahead.
Yes, Thanks, Marc I wanted to dive back into your revenue assumption, just real quick and I know Theres a lot of moving parts in those numbers that you said in your prepared remarks.
70 basis points related to delay lease that's assumption that back leasing that you had in your prior guidance that you are taking out and is that really related to the completed developments or is that says they can space. That's in the current portfolio.
It's both Michael and saw its currently available space and.
Which a lot of that currently available space inspect space, but it's not all spec space, but most covenants and then it's our spec space scheduled to come online yet this year, we push back some of those leasing assumptions you know, we always underwrite a year to lease them up in our underwriting, but when we came out with our budget and things and at the beginning of the year, we thought we could.
Beat that because we have been beating it we've been leasing things at 4.9 months now we're taking more of that one year approach. So we pushed back some spec leasing that's not in the population yet we pushed back.
Some leasing on empty space. That's in the population now most of which respect that was been delivered over last two or three quarters and then someone just the older second generation spaces not lease so it's a little bit of everything, but it's mainly spec space.
Okay.
Thanks.
And we will go to Viacom Rahul trend line with Morgan Stanley. Please go ahead.
Hi, Thanks, just two quick questions.
Thanks for clarifying that do denby, all encompassing including.
Debt I, just sort of want to go back to.
Compares enough of that works has to reset the 2009.
Discussions I recognize the portfolio is different.
Quality wise, but can you maybe talk about maybe differences in the.
Customer Ken makeup of the two portfolios and sort of what gives you confidence that it's likely to be less than less impactful. So thats of course, let's now let's say the second the 22% rents connecting me definitely definitely very interesting can you just give a sense of historically kind of towards the end of the month what collections have you done for the.
For the following month.
Yes, I think the reason we have.
I'll, just say generics I guess reason why we built ships were much better off in this cycle than the last cycle few reasons.
One were in better markets.
Two we have just better tenants, but our credit quality tenants in three we have a much smaller population small space with local credit. If you go back to 2009, we had a lot of small space spread across our system a lot of which was you know in non coastal high barrier markets.
Generally where our small spaces now or in places like South, Florida, and Thats not were small spaces for that so for all those reasons. That's why we're highly confident our portfolio will perform.
Much better this time.
And then your other comment on the May collections, you know that's as of yesterday, which was.
29.
That's so probably a little bit behind where we would normally be but in prepaid rent can vary quite greatly honestly from month to month.
We're just we're happy to see the tenants are still paying us early.
So I would tell you that if I had to guess you know I haven't seen any cash runs from today yet.
We may be just a little bit behind normal, but probably not a lot.
You still with Us Viacom.
I think thats. Thank you. Thank thank you.
Okay next we'll go to John Guinee with stifle and if there's additional questions.
Please press one zero at this time. Please go ahead Mr. Guinea.
Great. Thank you I.
I just noticed on your overall portfolio data for lease up.
Northern California, Southern California, and Pennsylvania, all appear to be below 85%.
Any rhyme or reason to those markets lagging.
I'm going to get where you're asked John what page are you on in the supplemental.
So im not on it anymore.
Far right column on.
Fox about.
Higher portfolio.
And I was sort of surprised to see northern and southern California sub 85, as well occupied as well.
Pennsylvania sub 80 hot.
Okay, well, let me I can comment on a couple southern California is actually 98.1.
The bar right column includes the under development, which essence spec projects Senate. So the actual end services 98.
The northern California.
Is just one building or 90% on our in service.
And then the other buildings under construction so no issues on either of those and then Pennsylvania, we have one spec building.
We delivered at just over a year ago, we still got to get leased up its on the west side of the Lehigh Valley, having zones, Steve 830, So yes, so thats a big drag on that is really one building we have prospects looking at it but we just got to get down leased.
Thanks, Good luck thanks, guys.
Thanks, John.
And we'll go to Eric Frankel his line with Green Street Advisors. Please go ahead.
Thank you for taking my question I know, it's very early and as you guys remark you know the capital market kind of inaugural it's like last couple months, but maybe you could just talk about what you're seeing real time in terms of pricing on on asset sales.
Yes, Eric this is Nick.
No most of the most of the market participants.
But things on hold.
I would tell you that there are some core long term lease deals that appear to be going under agreement.
At about 4% to 5% pre co that discounts.
And then any type of.
Multi 10 or value add type stuff.
Or just taking a wait and see approach waiting to see some data point in terms of brands.
And trade before they start.
Going back into the market.
Okay. Thank you for the color.
And we have a question from Jamie Feldman with Bank of America. Your line is open.
Just a quick follow up I know you guys had mentioned.
Public Reits have pretty much stop there, especially development pipelines I'm just curious what you guys are seeing from the private market.
In terms of verify and talk of supply.
Sure Jamie I think.
I think the private side is pulling back as well whether that's their decision or are there capital stack, but.
But we see we've seen the private side pullback as well.
So I think I think I guess as Jim indicated I think you'll see.
Healthier supply pipeline as we get into 21.
Because of that I mean, I think we all learned our lessons 10 years ago.
Okay. Thank you.
Gentlemen, there are no further questions at this time.
Thanks, Tom I'd like to thank everyone for joining the call today look forward to engaging with many of you throughout the rest of the year. Operator, you may disconnect the lines.
Ladies and gentlemen that does conclude our conference for today, we thank you for your participation and using the ATM executive teleconference. You may now disconnect.
Thank you.
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