Q1 2020 Earnings Call
Good morning, My name is FIA and I will be the conference operator today at this time I would like to welcome everyone to the first industrial first quarter results conference.
Lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If he would like to ask a question. During this time simply pushed all right and the number one on your telephone keypad. If he would like to withdraw the question press. The pound key. Thank you were talking about we'd like to turn the conference over to art Harmon mice.
President of Investor Relations and marketing. Please go ahead Sir.
I think it via.
Hello, everybody and welcome to our coal.
We discuss our first quarter 2020 results an updated guidance, let me remind everyone that our coal may include forward looking statements as defined by Federal Securities laws. These statements are based on management's expectations plans and estimates about prospects today's statements may be time sensitive and accurate only as of today's date.
Thursday April 20, Threerd 2020.
We assume no obligation to update our statements or the other information we provide.
Actual results may differ materially from our forward looking statements and factors, which could cause. This are described in our 10-K and other FCC filings you.
You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release supplemental report earnings release, and our SEC filings are available at first industrial dotcom under the investors tab.
Our coal will begin with remarks by Peter Busily, our President and Chief Executive Officer, and Scott Musil, Our Chief Financial Officer, After which we'll open it up for your questions also on the call today or Joe you up or Chief Investment Officer, Peter Schultz Executive Vice President, Chris Schneider, Senior Vice President of operations and Bob Walter.
Senior Vice President of capital markets and asset management.
Before we begin our team is practicing social distancing as we conduct this call. So we apologize in advance Bernie slight gaps or delays, we may experience, particularly when we get to the Q and a segment of our call with that let me turn the call over to Peter.
Thanks Art and thank you all for joining us today.
I'd like to begin my remarks today by saying that the entire first industrial team hope that you your families and loved ones have maintained your health well, we all do what's necessary to get through covert 19, together hopefully sooner rather than later.
With respect to measuring the eventual economic impact of Cobot 19 and related stay at home orders in the U.S.
It's still early.
Over the coming month and stay at home orders are reduced and eventually lifted we will gain a wealth of knowledge about how our actions impacted outcomes.
Well, it's still early we're extremely pleased about not only our strong Q1 results, but especially about how our team has performed during the past six week.
I'd like to say my first industrial teammates who have risen to the occasion maintain high levels of productivity and responsiveness to our customers well largely working from home and employing social dispensing practices to protect our customers our communities and each other.
Due to the shelter in place orders and most of the country. The virus has significantly impacted commerce unemployment has increased at an alarming rate in a short period of time and the second quarter is likely to show a significant reduction in GDP.
Prior to the shelter in place orders the vast majority of our tenants businesses, we're doing well.
So we're hopeful that the overall economy and their businesses will bounce back as the social distancing restrictions are reduced are removed whenever that may be.
Moving now to our recent run collection experience.
I'll start by saying, we value our tenants and our relationships with them.
In an effort to get ahead of these conversations in late March we contacted a number of our tenants to make sure. They were knowledgeable about the available financial really programs from the government.
In cases, where customers may not have had firmly established financial relationships, we refer them to one of our bank resource is willing to assist them in the process.
We also made an internal resource available to walk them through the loan application process.
[laughter] through the end of March we collected about 97% of our March fillings, which was inline with what we experienced before Kogan 19.
For April billings as of April 22nd we have collected about 93% which includes pier one.
For April billings for which we have yet to receive payment.
Approximately two thirds are in jurisdictions, which currently have moratoriums on evictions or evictions are being enforced which is negatively impacting collection.
Because we're in the early phases of experiencing the economic impact of Cobot 19.
It's prudent to include in our updated guidance, an additional 1 million of reserves for bad debt, which Scott will walk through shortly.
Moving now to rent relief requests from our tenants.
Including those requests from clearly well capitalized tenants total request for rent relief in the form of rent deferral or abatement represented approximately 90% of our April billings.
Excluding the well capitalized tennis and only including tenants that asked for specific terms. This represents 8% or April billings of which approximately 85% have paid April right.
This subset occupies an average of 40000 square feet and represent a broad range of industries.
At this time, we've not rented rent relief and it's not clear how many tenants what legitimately require retina Lee.
We hope the range of information. We've provided gives you an idea of what we are experiencing today.
Needless to say this is a point in time picture.
We won't try to predict when infection rates will begin to decline and when or how the phase out of the shelter in place restrictions will flow through to our tenants businesses and financial health.
Moving now to general activity in the leasing markets prior to cope with 19, there were a substantial number of new requirements across our markets led by E commerce in food related businesses, but representing a broad range of views.
In our portfolio as of April 22nd we have signed 72% of our 2020 lease expirations, which is consistent with our experienced the past several years.
These signs have a cash rental rate increase of 8.4%.
Over the past few weeks, we have seen leasing activity on most of our vacancy but the pace around some of those conversations has slowed or past.
As a result as part of our revised guidance, we have pushed out the leasing assumptions for two of our developments to the ended the year, which Scott will walk through shortly.
We feel very good about the long term prospects for our business. Then covert 19 virus has accelerated the adoption of E commerce for many consumers for a necessity as well as routine needs, which should those future demand.
We also expect an increase in inventories to provide cushion against product shortages due to supply chain shock such as we are experiencing now.
All in all in the long run these factors should drive incremental demand for industrial space.
Moving to dispositions.
We've closed on 13 million Upsells. In addition to the Tampa portfolio, we closed in early February.
Through today, we've closed on 40 million of sales this year.
Our way to meeting our 2020 sales guidance range of 125 to 175 million.
As we noted on our last call, we expect sales to be backend loaded in the year.
Note that ourselves guidance excludes the expected 55 million Phoenix out in the third quarter in which the tenant exercise its purchase option in 2019.
As always our sales process is focused on maximizing value for shareholders, while improving our cash flow growth profile.
As we think about new investment opportunities at this point in time, we will continue to be judicious with our capital within near term emphasis on maintaining liquidity.
We are proceeding with all of our developments in process, which totaled 1.5 million square feet and a total investment of 154 million at March 31st.
At this time, we're not targeting any new speculative development starts.
This includes the postponement of our plan summer start at first part Miami, where we will continue to monitor the market.
Due to the impact of Coven 19, we're seeing some delays in certain of our project as contractors and suppliers deal was shutdown orders social distancing requirements slower approval in permitting and other restrictions.
Oh This group only our 100000 square foot Philadelphia development has been hold it entirely due to state wide restrictions on construction deemed non essential although those restrictions will be lifted as of may eight subject to forthcoming guidelines.
As a result of these delays you will see in our supplemental page 22 at we've adjusted some of our estimated completion date accordingly.
Let me recap some recent investment activity.
In February we were pleased to acquire Nottingham raged Logistics Center, a 2 billion development forward totaling 751000 square feet in the greater Baltimore industrial market, where the sub market vacancy is under 4%.
The Park has I 95 frontage and is located just 12 miles north of the port of Baltimore at the intersection of room 43.
Today that 15% pre leased and we're seeing good interest on the remainder of the space.
Our total investment is estimated to be 82 million with an expected cash yield of 5.7%.
In the first quarter and second quarter to date. We also completed the acquisition of two buildings in the East Bay market of Northern California for a total purchase price of 14 million at a weighted average yield of 5.2%.
The first property is a 39000 square foot or Fremont and the other as a 23000 square foot building in Hayward, both R&D I 80 corridor, the buildings or 58% occupied.
We also acquired a 24000 square foot building in Los Angeles in the South Bay that we plan to redevelop the purchase price was 14.4 million.
In the first quarter. In addition to the first part Miami Land. We also acquired a nine acre site in southern California, Yeah in the inland Empire East for 2 million, there's developable to 189000 square feet.
On the development front, we placed in service, our ferraro build to suit development and Pvthree Evthree totaling 644000 square feet well the total investment of 53 million.
And the stabilized yield of 7.9%.
With that let me turn it over to Scott to discuss our results our strong balance sheet position and our updated guidance Scott.
Thanks, Peter let's start with our E P S and at the full for the first quarter.
Diluted EPS was 32 cents versus 19 cents one year ago.
They read funds from operations were 45 cents per fully diluted share compared to 41 cents per share in one Q2 thousand 19.
First quarter 2000, 20-F O includes our previously disclose restructuring charge related to the closure of our Indianapolis office and costs related to the best thing of equity awards for retirement eligible employees, we talked about on our last call.
This was offset by income related to the final settlement of one of our two outstanding insurance claims for damage properties that we previously disclosed [noise].
Excluding these items at the full remains unchanged at 45 cents per share.
First quarter. Epo also includes an approximately 800000 dollar noncash write off of a deferred rent receivable related to our lease with pure one in Baltimore.
We have received april's rent, but due to the economic uncertainty caused by the co bid 19 virus. We feel this write off is prudent.
We know we are now assuming pure one will pay rent through June and vacate the building the impact of which I will walk through shortly what I discussed our revised 2000, 20-F, ASCO and portfolio guidance.
Our occupancy was strong at 97.1% down 50 basis points from the prior quarter and down 20 basis points from a year ago.
As for leasing volume during the quarter, we commenced approximately 2.6 million square feet of leases.
459000 square feet were new.
1.3 billion were renewals and 925000 square feet were for developments and acquisitions with lease up.
Tenant retention by square footage was 68.9%.
Same store NOI growth on a cash basis, excluding termination fees was 8.4%.
We're free rent undeveloped bids accounted for about half of that growth.
The remainder is attributable to rental rate bumps and increases in rental rates on new and renewal leasing, which was partially offset by a slight decrease in average occupancy.
Cash rental rates were up 10.8% overall with renewals up 8.9%.
And new leasing 16.1%.
And on a straight line basis overall rental rates were up 26.5% with renewals, increasing 27.1% and new leasing up 24.8%.
Now moving onto the balance sheet.
At March 31st our net debt plus preferred stock to EBITDA was 5.2 times.
Today, we have approximately $70 million of cash and $400 million of availability on our line of credit for total liquidity of $470 million.
From a debt maturity standpoint, we have very little coming due in 2020 in 2021.
In 2020, we recently paid off a $15 million mortgage loan and have no other debt maturities the remainder of the year.
In 2021, we have a couple of debt maturities.
First we have a 200 billion dollar term loan that matures in January at an interest rate of 3.39% with a handful of banks with which we have relationships spanning many years.
We contemplate renewing this term loan inside of the expiring interest rate.
After that we have or line of credit coming due in October but note that the maturity date for the line is extendable for one year at our option, which enables us to push this maturity to October 2022.
Lastly in 2021, we have $63 million of mortgage debt coming due in October that we can pay off using the availability in our line of credit if the debt capital markets are co-operative.
And uses of capital, we anticipate development spend of approximately $100 million for the remainder of 2020.
And $35 million for 2021 for a total of $135 million.
These capital needs will be funded with property sales and excess cash flow after payment of our dividend given our AFFO payout ratio is calculated in our supplemental 66%, which is one of the lowest in the re world.
Moving onto our updated 2020 guidance for our earnings release last evening.
Our general assumption for our guidance is that the U.S. begins to return to work in the early summer.
Our may read FFO and FFO before onetime item guidance are both one $1.73 cents to $1.83 cents per share with the midpoint of $1.78 cents.
This is a five cents per share decrease compared to the midpoint of RFS, though before onetime items guidance, we discussed on our fourth quarter earnings call, primarily due to a decrease in forecasted and Hawaii due to the following.
We're now assuming that pier, one pays rent through June Thirtyth and Vacates.
At this time, we expect no income from this building after June for the remainder of the year.
This plus the impact of the write off of the noncash deferred rent receivable is about two cents per share.
We have also reduced our assumption for average quarter and occupancy by 100 basis points to a midpoint of 96.5%.
This reflects the push back of our leasing including pure one is I just discussed in the lease up of our remaining vacancies to the fourth quarter at first Joliet in Chicago and building be a first logistics center at 70 881 in Pennsylvania.
Excluding the FFO impact of pure one this change in leasing assumption represents an additional two cents per share.
Lastly, we are increasing our bad debt expense assumption from $500000 per quarter.
$900000 per quarter for the remainder of the year, which is a penny a share.
Including the $300000 a bad debt expense, we recognized in the first quarter.
Bad debt expense assumption for 2020 is now $3 million, an increase of $1 billion from our prior guidance.
Please note that guidance does not reflect any potential noncash write offs of deferred rent receivables related to tenants that are having financial difficulties.
Other key assumptions for guidance are as follows.
Same store NOI growth on a cash basis before termination nation fees.
2.75% to 4.25% a decrease of 125 basis points at the midpoint do our updated occupancy in bad debt assumptions.
Our guidance remains at $31 million to $32 million.
Guidance also includes the anticipated 2020 costs related to our completed in under construction developments at March 30 Onest.
In total for the full year 2020, we expect to capitalize about four cents per share of interest related to our developments.
Our guidance does not reflect the impact of any other future sales acquisitions or new development starts. After this call other than the expected third quarter sale of the building in Phoenix for which the tenant exercise this purchase option.
The impact of any future debt issuances debt repurchases or repayments. After this call.
The impact of any future gain related to the final settlement of one insurance claim from a damage property.
Guidance also excludes the potential issuance of equity.
Let me turn it back over to Peter.
Thanks, Scott before we open it up to questions again, let me. Thank the entire first industrial team for their excellent efforts during this unprecedented time.
We like all of you look forward to getting back to normal soon.
As a company we've built our business to perform through this cycle and particularly for unexpected times like these.
There are disciplined risk management and our investments in operations top rated customer service, a high quality infill portfolio and a strong balance sheet, we are well positioned to succeed in this turbulent environment.
Lastly, we are focused on serving and working closely with our customers for as long as it takes and to find the optimal outcome for all involved.
With that we will now move to the question and answer portion of our call. We ask that you. Please limit your questions to one plus a follow up and then you're welcome to get back into queue.
Operator would you please open it up for questions.
Thank you. So at this time I would like to remind everyone that if you would find to ask a question depressed star one again that star one for any questions well pause for just a moment to compile it became a day roster.
Yeah.
My first question will come from Dave Rodgers with Baird. Please go ahead.
Yeah. Good morning, everybody. Thanks for all the detail on April rents wanted to start there if I could I think period, the 19% of April billings requested relief and I want to verify that that was correct. And then also is that on a dollar of rent basis or was that on a percentage of lease basis I. Maybe I was confused about that and then can you dive a little.
Further into what you said requests for specific terms and kind of how you clarified that and how you're looking at that and then I'll follow up thanks.
Sure first of all is on dollars a 19% is on dollars.
Secondly in terms of terms typically asking for deferrals. Some a few asked for abatements and typically it was a two or three month deferral request.
Okay, and then how do you anticipate handling some of that I think it did I hear is that you haven't done any of those to date, but I guess as you roll to May what is your confidence in terms of and maybe roll it into a bigger question you've got pure one as part of the same store pool, you're rolling that out of July 1st.
But then you haven't really given any deferral, yet how does that all roll in as you kind of look at the end of the year between.
Sure one the remaining bad debt and then how you think about what deferrals you'd be willing to give sorry that was a lot of it.
Sure. So as you point out appear ones in the math.
With respect to the rents that we have not yet received.
Some will undoubtedly be granted or some kind of relief.
Some may end up in bad debt.
Right now we know it's interesting Dave everyday we get a red check from somebody who either asked for relief.
Flat out told us they're not paying rent.
So this is a really fluid situation.
In terms of any relief that we may provide we're going to try to recover that rent in 2020.
So that shouldn't have any impact on same store either.
Great. Thanks, I'll jump back in.
The next question will come from Craig Melman with Keybanc capital markets. Please go ahead.
[noise], just Scott or Peter just on the bad debts. So.
The million dollar increase if you assume that you know pier one is about a million half a year should we assume that a portion of their rent was already kind of assumed in that bad debt and as we think about the balance of the year fusion 300000, plus the million half of the back end. That's you know I'm roughly a million.
Too for the remaining three quarters is 400000 bucks of bad debt a quarter sufficient you think it in this environment or.
I'm trying to just thoughts on that.
Thanks, Craig I'm going to ask Scott to cover that question for you.
Hey, Craig the the pure one that the nonpayment of the rent the less the vacancy we're assuming that we will not impact or 900000 dollar per quarter bad debt assumption. So thats out of it now if we bill rent in May or June and we don't collect did that.
Will impact our bad debt expense, but as far as so so when you look at what we've established for bad debt expense in our guidance for the second third and fourth quarter, it's about $900000 and we'll give you a constructive of how we came up with that number.
The first thing we did as we look back to our experience back during the great recession in the worst years, we had with 2008 2009 in bad debt expense was about 85 basis points of gross revenues during that period.
So the $900000 per quarter for the second third and fourth quarter is about 85 basis points of our gross revenue. So that was our starting point.
When we asked ourselves with coal bid 19, it could get a little bit worse than what the great recession was.
But we said to ourselves in the past 10 years, we've done a lot to improve this portfolio intend a quality.
Specifically on the tenant quality front, we've sold a lot of buildings that had a lot of tenants in it and if you look at our average size tenant today, it's about twice the size of our tenant about 10 years ago. So we think the tenant quality today in the portfolio quality is better. So if we had this same portfolio back in 2000.
As it May 2009, we think are bad debt experience would have been less than 85 basis points. So due to those facts, we were comfortable with with the $900000 per quarter that we established for bad debt expense.
Got you so the pier, one just kind of coming out of occupancy not necessarily being treated in bad debt.
For the latter half of the year correct. If they don't pay may and June that will come out of bad debt.
Right. Okay, and then just separately Peter you know you mentioned that spec starts here kind of a no go but just bigger thoughts on development, even as kind of co bid.
Kind of dissipates the impact there I mean do you revisit the spec construction cap that you guys raised a couple of years ago does that get kinda throttled back a little bit or just given the size of the company, maybe that kind of stays and just kind of thoughts generally on your appetite for for spec.
Sure.
With respect to the cap I guess, I'll say remember, it's a limit and not a target. So the market environment, absolutely is what drives our decision, making and our underwriting a it isn't really whether there's capacity under the cap. There is about a 135 million of capacity ended the call.
Today.
And with the at the level of the cap of for 75.
Theoretically that can be higher given the way we've typically establish that cap, but we don't have any plans to increase it obviously in this environment, but again, it's it's not a target and and rationality prevails here.
Thank you.
Yeah.
The next question will come from Rob Stevenson with Janney. Please go ahead.
Good morning, guys, Scott or you given the what you did in the first quarter and though 2.75 to fourth quarter same store guidance for the year now are you expecting for deferrals et cetera to push a cash same store NOI negative at some point in 2020 here.
No as Peter mentioned earlier any rent requests that we grants in 2020, we're making the assumption that those are going to be paid back by the end of 2020. So as a result, there wouldn't be any impact where same store.
So what I mean other than pure one what drives down the reduction in guidance, given where you are now with first quarter already enough in the back yes, I'll just I'll just reconcile you from what our guidance was before under fourth quarter call, we set or same store guidance midpoint was going to be about four.
<unk>, 0.75%.
About 1%.
Offset has to do with our new occupancy assumption, so thats, having to do with pure one vacating June thirtyth, the not paying the remaining six months in other just decline in occupancy in the portfolio and then that's offset by another 0.3% related to our additional bad debt expense.
That we discussed in our guidance. So those two pieces gets you're pretty close to the 3.5% same store mid point that we currently are guiding on for 2020 cash same store.
Okay. So if you have leasing occurring before fourth quarter in your bad debt expense is it running you with high is 900000 per quarter theres upside to that number.
That's that's correct absolutely, Okay, and then Peter Joe Joe What do you guys looking for if you are going to grant deferrals are you guys just doing straight up deferral or are you guys going to be asking for rent Bob additional term other type of credit enhancements et cetera.
For granting any of these deferrals.
You know thats a lease by lease tenant by tenant conversation it really depends on the their particular situation. Obviously, we're getting involved in their financials and looking into their liquidity and and their ability not only to pay rent now but in the future.
And based on the pit that what that concludes that's how we'll respond with relief that we think is a win win for them and for us.
Okay. Thanks, guys.
Once again, ladies and gentlemen, if he would like to ask your question. Please press star one again, that's star one for any questions, we'll pause for just a moment.
The next question will come from Ki bin Kim with Suntrust. Please go ahead.
Thanks.
The 7% uncollected rent in April.
I assume that 7% deferrals and.
What percent of the deferrals does actually making it tend to.
Same store NOI assumptions.
Assuming the percentage not meeting that's had an outstanding 5% of collectibility threshold and such.
Hey, Ki bin its Peter I'll start and then I'll turn it over to Scott, we want to make sure that everybody is comparing that 93% apples to apples.
So I'm going to ask Scott to go through the 97 and what that means.
And then the 93 and the gap.
The apples to apples gap is 4%.
And we'll get into the answer to what happens that 4% after Scott So keep in what we had a couple of questions. On this is Peter mentioned, so we gave a statistic on our call that said, we collected 97% of our March rents that was actually at the end of March today, where we stand today, we're at about.
99% on that and I would say in our business with a portfolios as large as ours, it's not uncommon for tenants to take longer than 30 days to pay the red could be working capital issues could be new tenants that take a little bit longer due to make that first payment.
As far as the 93% statistic that we that we gave that was April collections as of today, we're pretty close to being on track compared to our prior co. Good 19 experience that was about 95%. So that's 7% that's remaining we've got another week to.
Our goal to collect that so that number.
That number hopefully will go up the remaining percent that's less well, we'll have to figure it out on a case by case basis on whether we do rent deferrals or not.
Now the last question you had I think if I can cover this is that we gave a statistic in the script requests with specific tenants.
Excluding companies that accrual clearly have strong balance sheets, and we gave that percent is 8%.
Now as it turns out 85% of those tenants have already paid rent. So they are sort of a disconnect between that statistic of what tenants are asking and the statistic of what's been on paid for the month of April.
I'll abdominal I'll see if you have any follow up that went through quite a few numbers there ki bin.
Yes, I think I'll have to go through that transcript on that one but.
So I.
I just don't exist on the 93% that we're talking about it that number could could go higher whatever's left over from April will make a tenant by tenant decision to determine if we need to do rent deferral I think thats easy answer.
Yeah, again apples to apples that 93 today compares to 95 pre covance today.
And at the end as a month.
That 97 in March compares to whatever the number is for us.
In April.
From now so the gap is not that big is really the point to actually get fairly small.
Yeah, I missed the opening remarks thinks that.
When you look at your tenant profiles I'm not sure what the best way to slice and dice it but how do you.
Categorize what you consider at risk Tennessee.
And I'm not sure if there's an element of looking at your bit ever tenants as smaller tenants or larger tenants and at that really matters to gauge risk profile, but or any kind of color you can provider.
Sure.
Really its instead of occupancy size will accompany size, we look at company size and we look at.
What business there in right now and it wouldn't surprise you that any business that whose revenues our wholly dependent upon selling things that involve people being outside such as sporting equipment or sporting goods companies.
Ship in both services or manufacturers furniture sales and distribution flooring catering nobody's, having any gatherings.
Moving services, so things like that where all of their revenues are dependent upon everyday activity. Those are obviously the companies who are having the most trouble.
Dealing faster question.
Yeah.
I'm not sure if you want to provide on open call about like do you have a sense of what percentage that makes up your hbr.
The total total balance is about a million for.
In terms of tenant.
Getting to the apples to apples comparison within that numbers exists some of those businesses.
Okay.
And just last question any.
Pure one type of tenants on the horizon that you're concerned are concerned about and I'm not sure if.
The automotive section.
Our risk or not like harm automotive.
I keep you. This is Scott I would say no. If we went through our March bad debt calls, we're going to go through our our April bad debt calls.
In early May, but where I stand today I don't see.
And a pure one tenants on the horizon with Karma.
We do have a substantial security deposit that they pledged with us when they lease. So we we had that credit enhancement for that tenant.
Okay. Thank you guys.
The next question will come from Rich Anderson with S.M.D.C. Please go ahead.
Thanks, Good morning, everyone hope everyone as well so just a question on the April rent again, if I may.
And this is just a perhaps you know that educational but do you book all of it let's think of April as the full quarter second quarter, just just make it easy when you're when you come around and you report.
Second quarter results would you have booked 100% of the rent, even though a small portion of it.
Not paid.
Or would that be adjusted.
Somehow because of the rent deferrals and win at what point do you engage bad a bad debt Contra account in all this like what's the what's the mechanism from which you start to start to you know to report bad debt in in that metric as well so three pizza lately.
Brent rent deferred and bad debt, how does how does that on sort of.
Got it so let's just assume that April is end of June and right. We're at 93%. It it doesn't grow we think it's going to though.
What we would do is we would evaluate.
That's 7%, we're either going to work with the tenants to assume deferral on it and if the tenants or credit worthy. When we think we're going to get paid back over the over the payment period, there would be no establishment of bad debt expense.
And there might be other tenants that we don't established bad debt expense it might pay US you know it's examples sometime in July so.
So for bad debt expense to be triggered we have to make the evaluation that there really isn't any chance based upon the company's business their liquidity based upon discussions that we're not going to get anything from them for their outstanding receivables and at that point of time, We would then take the bad debt expense reserve.
[music].
Okay, Great. That's that's helpful. Now what happens if you give a deferral, but you conclude that the the payback won't happen. This year. Then then what happens to the number.
But it might happen next year.
As far as far as bad debt expense no as far as the a deferral.
Okay, but you're asking if that situation happens, what's the impact on bad debt.
No I'm not asking that I'm asking if it if there is a rent deferral and you can you deem it a pay back a year from now how did that impact how you would report second quarter revenue.
If we would still report the revenue, we'd probably be on a straight line tight basis, if we would make the same evaluation. So.
If that is headed payback period is a year.
We would have to evaluate whether or not we're going to get that money back over that year period. So it's really the same analysis, obviously, we'd have to do a little bit more digging if it's a year payback because we're taking more credit risk on that perfect. Thanks very much for the second question is.
Are you, saying your in your press release, the exclusion of write off for deferred rent. It does that mean that theres a growing portion of tenants that you've moved from GAAP to cash because of the potential of pay of Collectability of rent in the future is that what I should.
That's very heavily so that has nothing to do with the rest deferral discussion we're talking about I understand that do with Guar example, when we talked about on the script. We said we wrote off $800000 of eight deferred rent receivable more shrake line rent receivable related to pure what.
Our GAAP accounting that receivable builds up over time in it decreases at the end of the lease since we made the assumption that we're not going to receive any more rent from pure one we wrote that off so that's meant to specifically address deferred rent receivables that had built up since the start of the lease and the reason.
And that we Didnt guide on it it was very difficult for us to come up with what our projection of that would be.
If you have a tenant and you're at the back ended the lease and you have a bad debt issue that number is going to be very small, but if you have a tenant at the front end of the release.
You have a bad debt issue that deferred rent receivables going to be a lot higher because possibly free rent periods in red bumps. So as a result, we're not including that in our forecasted guidance because it really is too difficult to project. We're as cash statistics, we have a 20 year.
History, or 25 year history with the company understood. Thanks, very much appreciate it no problem.
The next question will come from Michael Carroll with RBC capital markets. Please go ahead.
Yes. Thanks, I just wanted to follow up on the or the bad debt assumption Scott. When you went through it sounded more like that you're just performing a model exercise.
Have you.
Are you tracking any specific tenants that would be a concern or you're just kind of thinking. Okay. This is what happened historically and we're going to increase that because of the current environment looks a little bit more disruptive in the near term.
Yes, what I would say when you again when you look at.
When you look at where we're at on April I think there was a question about any pure ones out there, we're not aware of that and Mike frankly, we don't have enough payment history pre co vid opposed Kobe 19 to come up with our run rate on it. So we basically look back to the worst period that.
In the company's history for many companies during the great recession, we started.
We'll use that as a starting point and then again based upon the improvement of the port folio and tenant quality, we thought that that bad debt allowance was adequate but again as we stand here today.
We don't really see any any big problems on the horizon, but again, we're only one month really through this colvin 19 experience.
Okay, and then have you started to analyze things I guess the validity of the 8% of tenants that provided the details on there Im deferrals and do you anticipate providing any of those were just what some of the factors that you can look out for that well what I what I would say is this on the 8%.
That's who made requests.
A large portion of those Mike already paid April rent. So we're not really engaging those clients just because they have already paid April rent. So.
So anyway, so theres, a diminimus amount on that list, which is about 1% that's on paid.
So that 1% is probably the tenant base that we have to possibly go back and engage in a red deferral conversation.
Okay. Do you think that those same tenants will come back and ask for deferrals and May I mean would they restart the conversation or or would you start to conversation with them.
Here in the near term I think I think we would wait for them to restart the conversation again for us the vast majority of the tenants on that 8% leased list already paid April rent. So there really isn't a reason for us to go back and engage them.
But they might come back and asked for rent relief and again, we'll just have to take care of that on a tenant by tenant base as Mike.
Okay, great. Thank you.
Once again to ask a question. Please press star one again, that's a one for any questions over the phone line. The next question will come from CR 10 with JP Morgan. Please go ahead.
Oh, Hey, actually it's Mike I got disconnected into started so I apologize. If this was asked already but.
Q2 things one do you anticipate having any problems.
The disposition targets just keeping decline then maybe comment on that and then when you talk about a pause in spec development is it seems that safe to say that includes the value add acquisitions as well.
So than the first question sales guidance. So we've sold 40.
That means another hundred tend to get to the midpoint of our range.
We also are looking at look theres still demand on the part of users and investors for industrial. The question is how long will the wait and see happen. That's why we said in our remarks that we expect those sales to be backend loaded.
Our experience in the great recession, you might remember that we continue to sell $1 million to $200 million a year and the great recession.
And the assets that we were selling were not as attractive, let's just say as the ones that we might have to dispose of now so.
We feel decent about it but of course, we'll see.
Nobody has a crystal ball on on how long and how deep.
The economic disruptions going to be.
Im sorry, what was the second part of your question.
I just.
Just wanted to make sure that off spec developments when you talked about putting clause on spec development that included making to value added acquisitions as well by anybody can building leased about.
Yeah, well I mean again the emphasis is on maintaining liquidity until we have a clear picture.
About the duration of this disruption.
And again, you know Mike I can't say, we wouldn't do any value added depend I mean, obviously a huge one we probably wouldn't do given that conflicts with our objectives on the liquidity front.
Okay. Thank you.
The next question is a follow up from Dave Rodgers with Baird. Please go ahead Sir.
Yeah before we wrap up I, just want to talk a little bit about demand that you might be seeing in the last month to month since the the cobot outbreak happened and maybe diving a little bit deeper on that is what are you seeing in retrospect versus prior periods, maybe in April what types of tenants what size.
Either tenant or size of space are you still seeing activity.
And then maybe the second question is as you look out you guys talked about the economy may be opening back up in the early part of summer, but but what have you done in your own modeling and you're thinking about when you expect really leasing activity to recover in earnest I'm supposed to be my two follow ups things.
So I'll start out and then I'll kick it over to Joe Joe just to reiterate you know in terms of leasing activity that 72% of our 2020 rollovers that we've signed is actually a couple of points ahead of the prior two years and we're showing pretty good rent growth. There. So we're pleased with that so there is activity Jojo you want to add.
Details for treasures.
In terms of vehicle, but it's been very strong of course, and so I'm not point to add to that but in terms of.
Okay, well basically.
Cool bit basically you have industries, especially you still out looking for space that includes E commerce related a food related those companies that needed and has delivery.
Service is essential goods.
Reverse logistics also as actually picked up because of our returns you know, it's actually a and you would expect that due to increases in E. Commerce and finally ill are there are some short term needs because some of the product that's coming into the market is not.
Being absorbed if you may or bought and so those are looking for David short term space.
Hey, Dave its Peter Schultz, I would add to what Peter and Joe Joe said in addition to E commerce, and food and beverage medical and cleaning supplies as well and to your question, it's really been across space sizes.
And geography.
And while clearly decision, making has slowed and some requirements so put on pause.
We continue to see new RFP fees from prospective tenants as well as existing tenants that are expanding while there's no doubt that in person inspections have slowed businesses still happening.
To answer your question Dave.
Yes, thanks for all that and then the just the second part of it in terms of kind of how do you see the economy reopening you're talking about or maybe early summer, but then what do you think happens with leasing post that we back to normal does it take until 21 to to hit the ground. What's your at least base assumption here a month then.
As we as Scott pointed out in his remarks, our assumption is that we begin to reopen.
And get back to work in the summer.
Clearly that's going to be phase, we may have some hiccups, it's too difficult to project.
But but it's probably a gradual return to normalcy.
Clearly if.
The medical community comes up with treatment.
Not in a timely way or or in fact quickly that could accelerate the recovery and if they don't and were waiting and 18 months for a vaccine.
That's going to have a different impact on the pace of the recovery I think generally.
People want to get back to work, but obviously, we have to do it in a safe manner and none of us knows how long that's going to take.
Yes, Thank you all.
The next question will come from Eric Frankel with Green Street Advisors. Please go ahead.
Thank you I apologize I got disconnected myself and they like to the call I think most of my questions are answered regarding bad debt and and your your expectations for the year, but maybe you could talk about just industry diversification menu in your rent roll in and what industries, you're you're you're you're probably this pool.
Finally exposed to.
It's a pretty granular tenant base.
We don't have large exposures. If you look at our top 20, nobody's really that large relative to the rest back I think our top 20 is about 22% of our rent roll.
So it's hard to say, but we really don't have concentrations, we do have some exposures to two businesses that.
Well not farewell and this kind of economy, but the vast majority are doing pretty well and certainly have the wherewithal.
And the longevity to get through this.
Is there any percentage can you could you could you could you could point to regarding kind of those industries that are not doing well, but not a central's or or luxury items or so or entertainment. Everyone. Just described does a good business that are struggling to give a rough sense what proportion that is of your your tenant base.
All I can say is not large and small I don't we don't have the percentage of that's in front of us [noise].
Okay. Thank you.
Just two quick follow up questions one.
Yeah, you have a fair amount of Ah. So your portfolio in the South Bay in Southern California, maybe just talk about court activity and come to supply chain disruptions and how that's affecting tenant activity.
Around around the port.
Sure, Yes, Jojo you want to cover that question.
Sure. Thanks, Peter in terms of South Bay, and import volumes, Eric has come down and so containerized Ricardo the most correlated to our absorption is a container is cargo loaded imports and that has come down although.
It as we could see we continue to see contributors cargo come in and that those.
Products still has to be stored now South Bay has the benefit of being about 1% vacant so very very tight although you do have supply chain disruptions.
One of the things that we're seeing right now I'm just like some of my team members of alluded to you know interest.
And tour activity.
Slowed down a we're still responding to our piece.
A lot of the activity still right now is focused on.
E Commerce type companies right now that needs to be close to the population.
Again, the market is very tight lid, and we're working with existing tenants. There is still very very because of that very very local low low vacancy you know very few other choices for tends to move so that's the dynamic I right now in South Bay.
Okay. Thanks.
Minus that just one quick one other quick follow up question regarding your recent acquisition and Baltimore I understand up how is that the within the works for a while but it seems like you have a fair amount of of meeting exposure in that market in Submarket. Maybe you can just describe your investment thesis there is and how and how can I can be it sparing bolt.
Procure won and for Nottingham.
Sure Peter Schultz, you want to take that.
Sure Eric Good morning.
In terms of our thesis the Baltimore market has been a strong performer.
Record low vacancies in record absorption and if you look out the sub markets along I 95, north of the tunnel, which is where these assets are that you referenced so we just bought.
And our asset to pure one is in along that corridor.
The vacancy rate is sub 4% and it's really driven the majority of the absorption over the last several years by and large the majority of it of over 21 million square feet.
Two buildings that we bought.
Right that's been in the works for over a year. The buildings were built to our specifications and they have unparalleled visibility and on I 95 and access.
Off that access it's actually a former retail site.
That was rezoning for this project, so really a great spot there.
As we mentioned in the script.
15% Preleased, we've signed those leases.
Just shortly before closing and we're doing those T.I.s now.
And we've been pleased with the level of interest that we've seen on the balance of the project.
And our opportunity to outperform their buildings just for a little detail for you. The larger one is 585000 feet.
36 foot clear cross dock, the smaller buildings 166000 square foot front park rear load. That's the building a that has the pre leasing so over two thirds of that building.
In terms of pure one.
Scott had some comments about that we've not been given any indication.
That they're going to vacate they continue to be actively servicing online fulfillments and direct to customer orders.
But we thought that assumption was prudent and as we've talked about on prior calls.
We're comfortable with the releasing exposure again, given the other strong dynamics that have been.
Happening in that market and and demand that we continue to see.
Hopefully that answers your question.
Yes. Thank you.
We do have time for one final question that question will come from Craig Mailman with Keybanc capital markets. Please go ahead Sir.
Hey, guys. Thanks for taking the follow up just two quick ones just want to verify it doesnt sound like it but just want to make sure there's no security deposit.
Application to 93%.
Question, absolutely correct, that's that's payments coming in from tenants. It does not is there was no impact from security deposit applications.
Okay.
And then just up but Peter on your commentary around kinda two thirds of uncollected rents in areas with moratoriums are you seeing kind of well capitalized companies taking advantage of these eviction waivers or is it mostly kinda companies you would've expected anyway.
Kind of across the board and I want to be careful not I don't really want to say people are quote taking advantage. Some may may well be but it's also not in their interest to be let's just say playing games because.
Lots of bad things start to happen that they're not going to want to deal with judgments, we can draw down their security deposits or if they have an L.C. We can draw that down. They also there is other options are rights in their leases, including renewal options. So.
It's not in their interest, we simply pointing out that a high percentage of those that haven't paid or in those jurisdictions because it may be a factor.
Great. Thank you.
At this time I would like to turn the conference back over to Peter Pacelli for any closing comments.
Thank you operator, and thanks, everyone for participating on our call today, we appreciate very much your questions and interest in our company. Please feel free to reach out to Scott Our me with any follow up questions. We hope to see you soon in the meantime, we wish you in your family's good health.
Ladies and gentlemen, thank you for participating in today's conference you may now disconnect.
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