Q2 2020 Prologis Inc Earnings Call
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Later, we will conduct a question and answer session to ask your question at that time. Please press Star then one on your telephone keypad to remove yourself from the Q press. The pound key also <unk>. This conference is being recorded I'd now like to turn the call over to Tracy Ward Tracey you may begin.
Thanks, Jason and good morning, everyone welcome to our second quarter 2020 earnings Conference call.
Supplemental document is available on our website at <unk> largest dotcom under Investor Relations I'd like to States. This conference call will contain forward looking statements under federal Securities laws. These statements are based on current expectations estimates and projections about the market and the industry in which pro largest operates as well as managements.
Beliefs and assumptions.
Forward looking statements are not guarantees that performance in actual operating results may be affected by a variety of factors.
Most of those factors. Please refer to the forward looking statement notice in our 10-K or FCC filings.
Additionally, our second quarter results press release, and supplemental do contain financial measures such as I thought, though and EBITDA that are non-GAAP measures and in accordance with Reg G. We've provided a reconciliation to those measures.
This morning, we'll hear from Tom Olinger, our CFO, who will cover results real time market conditions and guidance Hamid Moghadam, Gary Anderson, Chris Katyn, Mike Curless at Nekritz Gene Reilly and clean Mcewen are also with US today with that I'll turn the call over time and time will you. Please begin.
Thanks, Tracy and thanks, everyone for joining US today, we hope you and yours are all well.
The second quarter played out better than our expectations in terms of both our results for the period and outlook for 2020 and beyond leasing activity in our portfolio market fundamentals valuations and recollections are all trending favorably.
Starting with results core AFFO for the second quarter was $1.11 cents, a share which included 23 cents of not promote interim.
Core FFO, excluding promotes came in above our forecast due to higher and alike.
And higher strategic capital revenues.
The increase in in a wide was driven by lower bad debt and higher occupancy.
For comparison, the quarterly results were in line with our initial 2020 guidance that we provided back in January.
Overall rent collection trends are excellent and as of yesterday, we've collected 98% and 92.1% of June.
We've seen the pace of rent receipts accelerate each month since March with collections ahead of 2019 levels for each month as well.
As a result, our bad debt provision for the second quarter was 58 basis points of rental revenues versus our forecast of 160 basis points.
Our share of cash same store NOI growth was 2.9%, which included a 42 basis point negative impact from bad debt charge.
Turning to leasing and customer activity segment benefiting.
Well.
Yeah.
Ecommerce normalized.
So we feel for SEC.
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[noise] [noise].
Good economy.
Remained very strong and continue to represent about 60% of our customer base.
Leasing in the quarter by industry was well diversified including from non essential industries.
Ecommerce normalize to 24% of new leases, you'll recall from the first quarter that number was 40% in the early days of cobot.
Negatively impacted segments include restaurants, hospitality oil and gas and convention.
Segments represent just 1.7% of our annual rent.
Over the last 30 days inner operating portfolio, we signed leases amounted to 16.3 million square feet.
Up 24% year over year.
Lease proposals have risen 20 brought 1% year over year and lease gestation has declined by 14 days to 44 days.
Market fundamentals were stronger than we expected in the quarter and we're now forecasting the falling for the U.S. in 2020.
Completions to total 250 million square feet, a 4% year over year decline.
Net absorption to total 160 million square feet, 60% increase from our April view, but down 40% year over year.
And year end vacancy a 5%.
Our forecast for year end vacancy rates in Europe, and Japan have also improved now at 4.5% and 2% respectively.
Strong leasing activity in the quarter has moved the falling markets off of our watch list Central PA Phoenix bulk Atlanta bulk in Guadalajara.
Our watch list acute Houston, West, China, Spain, and Poland, which move back into the list this quarter due to extremely on just one spec development by one private developer in that country.
Well strategic capital to promote for U.S. are left came in above our guidance as Q2 valuations were higher than our forecast.
Investor demand for our private funds remains very strong year to date, we've raised more than $2.2 billion of equity.
Approximately 17% ahead of our pace in 2019, which was a record year.
Our open ended fund to currently have equity accused totaling $1.8 billion with an incremental $1.4 billion and due diligence.
In Q2.
$448 million secondary trading or health fund was made with nine investors had a slight premium to anybody.
And $421 billion will be redeemed in our U.S. elephant in July.
Post these transactions redemption cues for open end funds will total just $10 million.
Looking to the balance sheet, we continue to maintain exceptional financial strength.
With liquidity, a $4.6 billion and combined leverage capacity between pro largest center open ended vehicles at levels in line with current ratings totaling over $13 billion.
Turning to guidance for 2020 or outlook has improved from last quarter, given what we see in our proprietary data our customer dialogue and the pace of rent collection, while there may be some headwinds in the back half of the year related to the timing in nature of economies reopening really believed that our revised guidance range has taken those factors into account.
Fear the key components of our guidance on an our share basis.
We are raising the midpoint by 50 basis points and narrowing the range of our cash same store guidance to between 2.5 and 3.5%. This assumes a reduction of bad debt by 50 basis points with a range between 60 and 90 basis points of gross revenues. This means that the midpoint, we're forecasting to reserve about 110.
Basis points of bad debt in the second half a year.
Today, we granted rent deferrals of 48 basis points of annual rental revenues and continue to expect that grants for the full year will be less than 90 basis points.
We are increasing our expected average occupancy midpoint by 25 basis points and narrowing the range to between 95 at 95.5%.
Occupancy will slip slightly in the second half, though not as much as we guided to in April and then the year at a very healthy level.
Globally that effective rents declined by 1.4% in the quarter as result of higher concession essentially giving back to growth from the first quarter.
Looking forward, we expect rents to be roughly flat for the back half of the year.
Our in place to market rent spread now stands at 13% and represents future growth potential of over $450 million of annual NOI.
We expect rent change on rollovers to be more than 20% in the second half a year.
Our strategic capital, we expect revenue excluding promotes to increased by $15 million relative to our prior guidance and now range between 360 and $370 million.
We're increasing our net promote income for the full year to 20 cents per share and we do not expect to earn any material Pembroke revenue in the back half of the year.
As a reminder, there will be a timing mismatch in the second half of the year as we will recognize promote expenses of about three cents per share.
We are forecasting a june a range of $265 million to $275 million down $5 million from our prior forecast.
Our outlook for capital deployment has improved significantly since April and we now expect to start $100 million of new spec in the second half.
Our revised starts range is 800 million to $1.2 billion for the full year with build to suits comprising 65% of this volume.
In addition to this range we plan to resume construction on 150 million of projects that were previously suspended. We're currently negotiating leases on roughly 40% of the T. I a de suspended projects.
At the midpoint, we're increasing acquisitions by $100 million contributions by $150 million and dispositions by $400 million.
We're now projecting that uses of capital to be $100 million at the midpoint.
Taking you some assumptions into account, we're increasing our 2020 core FFO midpoint by 12.5 cents and narrowing the range to $3.70 the $3.75 per share, including 20 cents of net promote income. This compares to our original guidance midpoint at the beginning of the year of $3.71 a share.
Year over year growth at the midpoint, excluding promotes a sector leading at over 12.5%, while keeping leverage flat.
Our three year CAGR has been tenant half percent outperforming the other logistics rates by more than 500 basis points annually. We continue to maintain significant different coverage of 1.6 times and our 2020 guidance implies a payout ratio in the mid 60% range and free cash flow after dividends of $1 billion.
Looking forward the long term growth outlook of our business has strengthened our investments in data and technology provide us with the tools to identify pockets of risk and opportunity within our markets in portfolio a significant competitive advantage.
I want to repeat some comments at the beginning because I'm not sure my sand was coming through so just want to repeat our results for the quarter core FFO for the second quarter was $1.11 cents a share which included 23 cents a promote income core FFO. Excluding promotes came in above our forecast due to high.
Higher in Hawaii, and higher strategic capital revenues the increase in Hawaii was driven by lower bad debt and higher occupancy.
For comparison to quarterly results were in line with our initial 2020 guidance that we provided back in January.
Overall rent collection trends are excellent and as of yesterday, we have collected 98% and 92.1% over June or July rents respectively.
We have seen the pace of rent receipts accelerate each month since March with collections ahead of 2019 levels for each month as well as a results our bad debt provision for the second quarter was 58 basis points of rental revenues versus our forecast of 150, well have 60 basis points.
Our share cash same store NOI growth was 2.9%, which included a 42 basis point negative impact from bad debt.
Turning to leasing and customer activity segments benefiting from cobot economy remained very strong and continue to represent about 60% of our customer base leasing in the quarter by industry was well diversified including from not essential industries E Commerce normalize the 24% of new leases, you'll recall from the first quarter that.
Number was 40% in the early days are covered so with that I'll turn it over to Jason for your questions.
At this time, if you would like to ask your question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment chicken Paul the culinary roster.
Your first question comes from the line of Steve Sakwa from Evercore ISI. Your line is open.
Hi, Thanks, Good morning, Tom Thanks for repeating some of that I just wanted to circle back on just kind of the leasing activity I know in the supplemental you guys provide leases commenced in.
Not leases actually signed in the quarter on is there anyway, and you did provide a little bit about the leasing activity in the last 30 days, but could you maybe just help but the actual leasing activity in perspective in Q2, how much of that was impacted in you know how did that maybe change month to month to get to that 16 million square foot number for us.
The last 30 days and then could you just also comment on the drop in occupancy in Asia. Thanks.
Okay, I'll start with that so from a leasing perspective, we certainly saw leasing activity pick up materially in June June was a very.
Hi month.
And as I mentioned in the last 30 days, we've certainly seen our leasing accelerate as it relates to.
Occupancy in Asia, it's related primarily to China, and small spaces under 100000 square feet.
Your next question.
My apologies glut.
Next question please.
Okay. Your next question comes from a line of Craig Melman from Keybanc capital markets. Your line is open.
Hey, guys I'm, just a quick question on kind of what.
Activity, you're seeing big box for small box I know there were some.
Concern or earlier or post co. There just curious you I know you guys took Phoenix Atlanta Big book off I mean are you guys seeing.
Better activity across the board or is it still kind of primarily in some of the bigger spaces.
Yes gene I'll I'll take that one we are certainly seeing better activity with bigger spaces and that that is would has led to taking those markets off the list.
And Conversely, small spaces have struggled we see more softness in this category.
And you know this is these are segments that that we're focused on but having said that are a property quality is excellent and those and those segments.
And we'll expect to recovery, but right now you certainly see better activity in.
In the bulk spaces.
Next question. Please your next question comes from a line of Kevin comes from Suntrust. Your line is open.
So a couple of questions the higher a decent proposals that you've seen over the past 30 days I think you said, 21% higher.
I'm just trying to get a sense of is that mostly renewal activity or expansionary space and second question when you.
I mentioned on the positive leasing stats I mean, obviously increase your guidance for same site NOI in and build to suit activity.
But if there were one or two things that you really look that could give you confidence that midway through to your to increase guidance.
How much of it was based on.
Customer feedback on the confidence your corporate coupled with our theme furthest hard metrics like leasing stats.
Okay.
Yes, let me let me start by answering that question, obviously, we're having some difficulties here with our.
Conference operator.
Yes, it does the a activity accelerated obviously in the month of June and it's pretty broad base than I think for the best indication of that.
You can look at our built to suit volume because it's up substantially in terms of percentage in absolute the now and that tells you something about the scarcity of space out there because that's.
What people have to turn to to get there.
Space needs are met so Mike you Wonder if you want to elaborate on that somewhat.
Yeah, we're seeing.
Broad based activity everybody. If you believed all the hype you saw the you would think it's all Amazon that Amazon clearly is ramping up their activity that we're seeing indefinite broad based activity across a lot of sectors.
Home improvements picked up appliance business is strong and actually seen quite a bit of activity from the food crowd on or build to suit list.
Thank you got to remember as there has been plenty of structural rollouts that were announced and well underway pre co bid and so it's not just names on their big part of it but look for a lot of broad based demand and keep that build to suit list a strong.
Your next question comes from the line of Nick Yulico from Scotiabank. Your line is open.
Hi, This is a cement here for Nick I'm, just a quick question actually following up on that build to suit. So you know there was I think I think how did this into the pipeline to strong this quarter was a build to suit with 48% margin.
What's especially about these do open stood there so creative to the margin and there's such a wide spread between.
The development cap rate and the stimulus sort of market cap rate that that would win one would anticipate and secondly, as a follow up.
Just thinking about promotes I know that fourth quarter has something coming up from Brazil, a core fund in Europe, and the U.S. heavy so what's driving the lower expectations on promote income for those.
Summing all this Mike I'll hit the first one on the.
Higher than normal build to see margins, you're looking at a small sample that said there are a couple deals there that were more of the parking lot.
At least parking lot flavor and those tend to be very.
Very well located have relatively low incremental investments paired up with strong rents. Therefore, you see really strong margins, but I would look for those margins to blend in well over the year normalized to the overall build to suit body of work in the mid Twentys.
Tom you want it the other thing.
Yes, so I'm going on your second question on promotes the second half, it's going to be lower really small because the promotes are effectively just based on development. There's very little you win in those funds that will.
Promote eligible in the second half and remember we've got three cents of promote expenses that will also will be incurring in the second half the year.
Your next question comes from a line of Derek Johnston from Deutsche Bank. Your line is open.
Hi, everybody. Thank you has cobot induced E commerce acceleration pull demand for it in your view and secondly, where are we in the shifting secular landscape does it feel like we're mid to too early late innings I just would love your take thanks.
Yeah, I think this is more like that.
The board Mac, Andrew a match up back in the late seventies.
We don't know how many units innings or in this game, we keep going into overtime.
And I think we're very early in the rollout of Ah Ah ecommerce I you know ecommerce started the year in the low teens in the U.S. the numbers there in different places.
And there's no telling how far it can go if it goes to 20, 25%, which is where was at the beginning early early stages of kogut or stabilizes hired and that this could be very very early in the E Commerce rollout and a you know initially obviously, we've had a clear market leader.
Her which as Amazon in excess of 40% of the total volume, but we're seeing Brett in terms of different etailers that are now growing their businesses and have found that there footing. So so I think we're in very early stages and as you know E. Commerce has a sort of a supercharged effect.
On a logistics demand.
Okay.
Your next question comes from a line of Manny Korchman from Citigroup. Your line is open.
Hey, everyone.
Yeah, there's been I guess, a rebound in concern and supply coming up so two questions related to that one what are you seeing in terms of our conversion of use whether that be retail properties or.
Maybe even office properties and some anecdotal stuff that we've seen and secondly are all developers being at this point of view and trying to keep their build to suit volumes high in their spec volumes lower or we running the risk they were going to see a lot more spec not from for largest but from your competitors are peers.
Yeah, Let me take the second part of that first eat places that we see undisciplined develop them.
Our view Poland is clearly one and I would say Houston is seeing more building then it should I mean, there's more product coming on line in Houston, then yeah the demand warrants.
But generally I would not say, there's an overbuilding problem or anywhere near it and if you look at the numbers.
That I think Tom talked about at 250 million square feet. That's about the normal run rate for CRE construction, and it's actually a little bit down from our forecast at the beginning of the year. So I think this year demand will fall short of that level of construction.
But it's not because the supplies excessive it's because demand temporarily will pick a dip.
And in my view will accelerate as we come out of this thing because of the growing percentage of ecommerce and also the need that to carry.
Morning inventories.
With respect to the first part of your question could you could you asked that again, because I'm kind of little unclear about Oh conversions conversions.
Well Theres a lot of talking about it and I think in time, you will see conversion, particularly of retail and E.
The.
But there are obstacle then we should talk about those obstacles number one.
You know boxing the middle of a shopping center is subject to all kinds of reciprocal easement agreements and it's not really easy.
To go back and just redevelop one box obviously those boxes are in the right locations because.
You know there in the middle of dense populations and a high levels of income. So the locations are good but they are our internal dynamics that make it difficult to do that so you have to respect the our E A's and all the other arrangements also zoning is an issue because you need to convert from retail too.
Industrial zoning and that takes longer than you can imagine because neighborhoods that they'll one trucks and traffic a there and finally there was an economic issue a where these retail boxes are in somebody's books for you know several hundred dollars a square foot and you need a number a much lower than that.
Make sense or logistics, because you need to also spend money to convert into logistics use is not at that they're set up that way. So I think in time, you'll see more and more at this kind of development, but it's not a surge and I think we're involved in a number of but it's a tougher and it.
Takes longer than and you can imagine this stuff that you hear about hotel rooms, or office has been temporarily use for logistics, a we've seen that before during holiday season.
When things get really crazy, but those are really for last touch distribution purposes that they're not really permanent space because economically they're not viable for long term.
Long term were just six years.
Your next question comes from a line of Vikram Malhotra from Morgan Stanley. Your line is open.
Oh, Thanks for taking my question just two questions. One could you give a bit more color on kind of how market rent growth may have trended a you know month <unk> you know over the last few months and particularly in the U.S. Bush's globally.
And then second you couldn't give us a little bit more color on kind of utilization of the cost to capital that that you now have which you know there may be being questions few months ago, but today, it's pretty robust. So I'm. Just wondering can you give a little bit more color between utilizing that for development acquisitions and maybe even in many.
Yeah. Thank you because Ah so two questions with respect to market rents in the last I think the best way to think about him is that we are basically on the same track we were before but with a pause and interruption in other words I would say in this area code that at growth has been continued.
I believe they will flatten for the balance of this year just like our Guy guidance suggests and then we'll pick up on a path of growth and the reason I believed that is because there's never been a cycle, well where golf growing into it or going into it we've had high occupancy or you know.
They can see being under 5% and also very high utilization rate in the mid Eightys and Ah Theres no sign that those numbers are in any way deteriorating. So I think the market continues to be strong and I think we'll be back on on a trajectory of rental growth not too dissimilar with from what we were projecting it.
Beginning of year.
With respect to use of capital you know I continue to believe that there is relatively little differentiation.
Between different in a company. So M&A is usually pretty tough I mean, we've done it successfully in a couple of instances, but increasingly the targets are less and less compatible with our portfolio in terms of quality and also there is a pretty on the companies are writing.
Trading right on top of each other in terms of multiples don't ask me. They explained that because the growth rates have at least historically being substantially different but.
But I don't make the market and react to it.
The place that is always the best use of capital for US is building out our land bank, because we already have to land and the incremental returns on capital are the most attractive, particularly with the kind of margin that.
That that we were talking about earlier and Mike referred to now that's a pretty disciplined business you can't do an infinite amount of that kind of development, but that's that first place we will go to.
I'm just straight acquisition of assets.
Look I'd just like I said last quarter I don't think pricing of logistics real estate is going to soften in fact, I think cap rates are gonna compressed because there's a lot of capital. That's a place to go to go into real estate and obviously there sectors that are not going to attract their fair share capital like.
They did before so that capital is piling.
In the two sectors that are performing well. So I think the best use of capital is building out our land bank.
Your next question comes from the line of a John Kim from BMO capital markets. Your line is open.
Thank you you talked about leasing volume being healthy sounds like it's picking up.
But you also discussed the dip in occupancy in the second half of the year is this an indication that you're looking to push rents that were occupancy is it a greater downtime from bad debt expense or this or there other factors that contribute to that.
Yes, John skin, Okay, I'll take that one I wouldn't I wouldn't draw a conclusion from the next two quarters forecast on our optimism.
About the demand demand has been good as we mentioned.
At the outset and have.
About 60% of our.
Portfolio customers are expanding.
But some are shrinking.
So it's a it's a balanced view for the rest of the year and the reality is that until we until we come out of coated and we and we see economies reopening we won't have complete clarity.
So I would I would actually point too.
Later in the year 2021.
We're going to come out of this and I think as a meeting set him a few moments ago, I think you'll see a continuation of the rent growth, but until there's clarity on reopening there has to be a you have to have a balanced view.
Yeah, and the only other thing I would add to that is that beginning of the year, we're forecasting essentially 260 million feet a demand and supply.
And now we're projecting 250 million, Peter demand and sorry supply and 160 million square feet, a demand, which is down from our original forecast or so if you forecast you know 90 million square feet of demand you know obviously you have to.
Go along with it a pause in rental growth so that that sort of outlook is consistent both between demand and governmental picture that goes along with it.
But when we come out of this thing I think for reasons. We've described before namely an increase in inventories generally 5% to 10% and also the stabilizing share of E commerce at a higher level them before we'll actually lead to a surge in demand or which will.
Makeup in my view more than a the 90 million feet, we lost a where we projected lose this year.
Well nobody knows I mean these are these are all our best guesstimate.
Your next question comes from a line of John Peterson from Jefferies. Your line is open.
Great. Thank you good quarter guys, Oh, Yeah first of all hoping you could update us on how IBT, an LP to you're doing versus underwriting, but then also curious with both those transactions. It greatly increased your exposure to the U.S.
How are you thinking right now considering international markets seem to be getting back on their feet quicker than you asked on you know exposure to the U.S. versus exposure to international markets.
Yeah, you know international is that there is a big.
Spectra and Ah you know on one side of it you have places like Poland, which is suffering from overbuilding, Spain, which is we can demand and then you have places on the other into the spectrum that you would never get.
Tokyo is under 1% vacancy Osaka, where the vacancy wasn't the team then is now in the 5% range and wherever leasing up a pretty much everything we are building ahead of schedule. So Ah. So obviously, there's a wide variety overseas, but if you sort of throw all of the overseas markets together.
I would say generally there had slower than the U.S., but not materially so and a gene may have more granular commons than that but that's very consistent actually in terms of in terms of market strength.
Yes.
Yeah, and you add John about underwriting.
And we're actually a little bit ahead of underwriting on both of those portfolios.
That's true, but we've seen the last few months and we'll revisit that the ended the year, but things are looking good you know obviously for Liberty.
Houston exposure is is going to be challenging for a bit.
But on the other and Pennsylvania portfolio, which is which is the biggest piece of it has actually done quite well, leading us by the way to bring central Pennsylvania off the watch list. So so a little bit ahead of plan so far.
Your next question comes from the line of Jamie Feldman from Bank of America. Your line is open great. Thank you I was hoping to get your thoughts on two points number one is I know you mentioned with the.
This year's development pipeline looks like or deliveries look like can you give some color on what things look like heading into 21, given that there was this a pullback in starts.
And then also just you know given that you did increase guidance just thinking about the lingering risks ahead, whether it's the election PPP.
[noise] subsidies burning off cases rising in other markets like what what gave you comfort to get more positive here, even though there are some things lingering out there.
Hi, my behavior on chart.
Jamie genes Kinda give you the real answer, but but the short answer is customer behavior.
We don't make them marketed we just a observe what happens on a real time basis, but you can go ahead and talking about the detailed.
Yeah, I mean, specifically, Jamie we're we're adding sort of a net of 250 million of spec.
To the plan, we're still way below the January forecast and those are like 15 projects and 15 different markets. So they're they're bets that are being placed based on the customer demand in those markets and wouldn't be surprised if that number increases you all to acid.
What happens going into 220, 21, I think we'll we'll wait.
City.
What happens before we talk about 2021, but where we obviously have a much more confident view on building spec today than we did in April.
Yeah.
Your next question comes from the line of Dave Rodgers from Baird. Your line is open.
Yeah. Good morning out there just when thinking about your portfolio as you've moved more infill with respect to maybe service oriented customers versus distribution oriented customers wanted to kind of thinking about how those conversations are going with those customers. In are you guys still targeting rents from the ended the year and they're accepting that is there a big differential between what their interest.
The painting in rents and what you are so that's the first question. The second is just for cap rate compression them be do we need to get past the point of increasing vacancies do we need to see rents grow again before we see that materially happen or is the debt side of the equation enough to make that happen. Thank you.
Dave Let me just start and Jim will give you more details on cap rate compression, we're already seeing good, particularly in Europe and a there there's plenty of transaction evidence that that those cap rates are holding and in some cases declining and by the way that some friends generally with our valuations that had been held flat.
And remember valuations are backwards looking I mean they were.
If they had the evidence of the last month of transactions I think those values would be up with respect to distribution is space. You know as we've said many times Port life is operates in in all four categories of space, whether it's flat touch all the way to gateway cities the larger spaces in it.
Major markets and that distribution is pretty balanced and in fact, we have a paper out there that's not too out of date that shows exactly what our position is it in each category. So you know, we haven't really materially changed our allocation to different markets.
It's just that we get more questions about the last touch market. These days than than we did before you know the old and be strategy was very much large markets and infill locations. So that's where that portion of the portfolio generally it's coming from.
Which is getting a lot of attention. These days gene he want to elaborate on that.
Yeah. The only only thing I'd add is you asked specifically about rent growth in infill locations and today, we have certainly seem much more much higher rent growth in these locations and as you can imagine there's a bit of you know market pricing discovery going on because these there these are.
Submarkets that generally are immature for this kind of use and the product types.
[laughter] basically span a huge range, but so far those those.
The growth in rents have actually surprised us the upside.
Well, one either a thought that I'll, just try and their you've heard us talk about this many times, but logistics a rents are only 2% to 5% call. It given a wide range of total logistic costs and that the rest being made by labor and transportation, so really the ability to pay.
For the customer is not the issue because even if they pay 20% more rent on an item that you know a 4% of their total logistics does that 80 basis points more in caught so that's not what drives it what what drives really rental growth is how I'm anxious is your.
That's next competitor in terms of dropping out rents, that's what determines that not the customer's ability to pay rent and generally speaking with when you are operating at around 5% vacancy, which is where we are a there aren't that many a competing spaces around so continues to do.
We continue to have pricing power generally most markets, obviously, the houston's of the world or are different.
Your next question comes from the line of Blaine Heck from Wells Fargo. Your line is open.
Great. Thanks.
Good morning out there. So just a couple questions here on rent collections and same store Tom I think he gave rent collection figures for June that might be excluding deferred rent.
If that's the case can you give us the June in second quarter collection numbers based on the cash of its come in relative to kind of your pre cobot billing expectations and then secondly, you guys have reported strong rent collection results relative to a lotta research out there, but it just seems to me like the amount of uncollected cash.
Rents, it's still a pretty tangible headwind in for you guys to still coasts, 3% cash same store in the face of that headwind is it's very impressive frankly soon so maybe you can reconcile how cash same store can be 2.9% with you know even a few percentage points of uncollected cash rents that'd be really helpful.
Okay Blaine so on the recollection as I'll restate. So in June we collected 98% in July we collected 92.1% we deferred.
About 190 basis 195 basis points of rent a in June and about 70 basis points or branch in July so that that wrench not do so it's not in those numbers.
Those collections numbers now our collections as I stated are doing extremely well. We're ahead of last year since since we've really since March every month. We're ahead of schedule now Oh, we believe we are going to collect all the cash a with the exception of what we think will we've covered in a bad debt reserve. So weve assessed we've gone.
Through we've assessed industries, we've assessed based sizes, we've looked at all the different metrics, we looked at individual.
Customers across our portfolio and we feel really good about that bad debt range of 60 90 basis points now it's lower than we had projected in April for sure meaningfully lower.
But it's because of the collections are so strong if I I would anchor back also to the fact that are bad debts history. On average is about 20 basis points. We go back 14, 15 years, we've averaged 20 basis points about debt now are high was 56 basis points in the GFC and that's kind of what we saw here.
In Q2, so I think I think we've.
The second half bad debt adequately covered in the range, probably and then some and I feel good about getting the rest this cash in the door.
Your next question comes from the line of Michael Carroll from RBC. Your line is open.
Yeah. Thanks, Angie I wanted to dig in a bit digital market trends that you highlighted on can you provide some color and whats drove the improvement in central PA is it just better demand and then also with the issues that you're seeing in Houston is that simply just supply in a weak energy market.
And our developer slowing down construction activity. So just trying to take time to absorb that base or other these longer term issues that we have to deal with.
Yeah, so in a in Pennsylvania, so leasing.
You know so the improvement is related related to leasing in Houston you have Ah you have obviously two headwinds on demand you got energy pricing as well as a as well as coded and you have a huge amount of construction in progress at the beginning of this year now some.
With that was suspended but but frankly the vast majority was not so you're gonna have an overhang of space in Houston. You know go is easily going into next year sometime because there's just so much supply.
In terms of.
Developers and being disciplined or not.
I think a I think frankly, the jury's out on that.
So right now things appear to be.
Discipline, but I would have hoped frankly that we wouldn't see more projects stopped.
We didnt see that so I think we I think we need to monitor the that aspect of it but unfortunately in Houston, you have a supply issue as well as a demand issue.
Your next question comes from a line of Eric Frankel from Green Street Advisors. Your line is open.
Thank you just talk about E Commerce, again, obviously, an Amazon and not quite active and might you commented on some of the longer.
Longstanding supply chain reconfiguration efforts by home improvement on equipment companies appliance companies food and beverage could you talk about how something to be the big box retailers are adjustments you could they obviously had a huge searching ecommerce sales I'm just curious if the adjusted their or they will conduct Justin warehouse with friends at all.
[laughter].
Yes, Eric Thank you were.
Seeing activity from those retailers not at the pace, we're seeing from the traditional ecommerce, but we certainly have on our prospect list. Some household names that you would consider in the retail business that are you looking to shift from brick and mortar and to make more warehouse to reach a consumer shipments. So we're definitely seeing an uptick in that.
Segment.
Oh.
Yeah home improvement and grocery sectors are particularly strong.
Your next question comes from a line of Tom Catherwood from BTI GE. Your line is open.
Thank you and good morning, I just wanted to actually follow on Eric's question about retail and specifically from the bricks and mortar side.
Since 2011, obviously, you've reduced your exposure a little growth industries, but I assume no one is immune to the pain, that's happening in brick and mortar retail. So first off I know, it's a small number but can you remind us what your exposure is to brick and mortar retailers, especially on the apparel side and then second.
Just a risk the challenges could show up for some of your other tenants like threepl that have retail exposure of their own almost like shadow retail exposure for pro largest.
And this is Chris Thanks for the question. So first as it relates to Apparels specifically that is.
Roughly 7% of our customer base and there's going to be both.
Native ecommerce and traditional brick and mortar retailers in there so you're going to happen diversity of our approach our analysis.
Looks through.
The organization, so whether it's a retailer whether it's a threepl. So we think through that exposure just like you described and so the way we've been talking about it for the whole decade or has been consistent with how you're thinking about risk.
Your next question comes from the line of Mike Mueller from JP Morgan Your line is open.
Yes, hi, or are there any changes to the lease durations for the bumps that you've been getting in recent leasing activity.
Okay.
Not maturing might go thanks.
Mike not materially on the right before this thing the.
Ah lease durations were had extend that.
Probably the longest we've seen in about a decade.
But and basically leases that are of term has stayed about the same level of duration, well, we had higher month to month leases.
And that is pretty typical of what happens in this in this part of the cycle, where normally somebody who is business was growing.
May be coming out of a smaller space voted bigger space or going the other way frankly, but I'm moving is expensive and committing to a new spaces expenses. So sometimes the best solution. It's just too.
Basically pay overage rent and kick it out couple of months. So we are we have a higher percentage of leases under one year, but the ones that go longer than a year or about the same profile as they were before and with respect to escalation structures are pretty much consistent with before a slightly more free rent on the front end.
Which is how the.
The effective rent comes down I think Tom mentioned that the effective rents were down 1.7% face rents haven't changed all that much in most markets.
Your next question comes from the line of Nick Yulico from Scotiabank. Your line is open.
Hi, guys Sumit here again, thank you for taking my question again.
So Walmart is closed on Thanksgiving and that that goes to assume that they're expecting more online sales traffic.
Living in produces U.S. portfolio I think you bought it from me.
Infield perspective, how does that manifest in terms of increased rent growth for those properties. So what I'm thinking of is not.
You are properties off of Tracy or out or exit eight New York City, but more more is it kind of stuff that you have in let's say, the middle lens in new York city or or or or Bronx.
When youre underwriting. These are these properties, what's the sort of rent growth here that you're putting into dee.
And how does you know situation so on the grounds like what we're hearing with Walmart now the retailer has changed your view.
You know, though the thing I would say about Walmart specifically is that obviously, we had them in one property and in the Bronx, and as you probably have read into headlines or a day no longer needed that property because of what you described them we were able to.
Really said with no interruption to another major E commerce player a at actually very attractive economics. So that's the only direct impact that I can see from Walmart if you're if your question is specific to Walmart.
And they didn't have much of a presence into new York area anyway to for it to be a headwind. So there were just really getting started that tried for many years to get into that market, but it's proven to be a difficult market to get into and it appeared that for a while that ecommerce was the way they were going to come into the market and.
Currently they've changed their mind I don't know if your question was broader than Walmart, but but that's a that's starting with Walmart.
Your next question comes from a line of Manny Korchman from Citigroup. Your line is open.
Hey, it's Michael Bilerman with many you know immediate the November Investor day, one of the topic.
The team spent a lot of time.
Focused on was trying to have value beyond the real estate and really trying to find solutions to a lot of the supply chain costs.
That would offend actually allow you to be able to garner more rent. So looking at transportation digital data solutions looking at labor costs and trying to find opportunities for your tenants to reduce those costs and ergo allow them to pay you more rent and I think you talked a little bit earlier.
Before about how rented the smaller part of the overall cost structure. Therefore, if we're able to I get benefits and all those other items, we should be allowed to charge more rent, where do you sort of scanned and have you been able to advance any of these initiatives further ultimately getting to that I think.
It looks like a $150 million of potential upside overtime is you implemented these things.
Sure Michael I'm glad you brought that up because that's a very important part of what we're spending time on and I'll, let that Gary give you the real answer, but Oh my event vantage point our performance there has been mix. So with respect to the things that are going very well I would say R.L.E.D. and they should.
Our procurement initiatives.
Our services and our product offerings that go with that they use a warehouse are going pretty well and are generally on track.
The the more aspiration all aspects of our product offerings transportation.
I O T. I would say those are too early I could have a result on the labor front, we're actually making really good progress as well. So it's a mixed picture Kobe. There's also obviously interrupted our ability to market or some of those services to our customers there frankly focused on either.
Problems right now, but we've come up with new products through offered to them. In this time, you know like feed cleaning services and other things.
That we rolled out where it specifically targeted towards cobot and so it I would say our enthusiasm for that business is oh, the same or stronger than it was before and I would say materially stronger than before.
Our execution of it has been pretty good in some areas than has been interrupted by.
By cobot in some other areas, but we haven't changed our objectives in the medium term on that Gary do you want to provide more color just just a little bit Michael if you remember we had shown bull's eye dr.
Yesterday and these are the Bulls eye you heard that we were currently focus those are the areas that he was talking about and that's the or is that we've gotten some pretty good traction so.
Well in revenues, though it's not huge system.
<unk> so <unk>.
So if somebody out or wins.
Which I would be late for transportation and higher ticket somebody said those are little bit longer term.
No I think we're more optimistic about essentially.
We were even at that point.
Oh.
Your next question comes from the line of Kevin come from Suntrust. Your line is open.
Tom So if I remember correctly, when you guys bought Liberty and IBT. It was part of the original plan to solve assets and you've done a lot of it already but I believe 2021 was supposed to be a kind of materially year for disposition any update to those plans.
Yeah, Hey, Ben if you remember that last call.
And actually the call before that.
We pushed that back we are very under deployed right now our leverage is under 220% then.
So there is no rush whatsoever to sell those properties. If you do a little bit of poking around view pretty quickly figure out that we've got a pretty a significant portfolio for Mike from Liberty a for sale in the UK and that one I'm wearing the price of collecting a letters of interest.
Then offers and I would tell you that demand for that product is triple or quadruple what we expect that and Ah I think we're gonna have a very strong execution on that but on the rest of it or we're not we haven't even put out the packages because why do it we don't need to do it right now and.
We can just to be that's very liquid real estate and we can do that anytime and our decision is that pushed that out until we have more deployment.
And and meet the capital frankly more.
Your next question comes from a line of John Peterson from Jefferies. Your line is open.
Great just a quick one I know what kind of on the hour here any chance you guys could break out rent collection between Europe, and the U.S. Asia's smaller, but maybe there too I'm just curious if there's any material difference between.
Those markets.
Yeah on we actually look at that on a daily basis.
Obviously, even more detailed than what you just asked that we'd look at it by country and we can have the ability to actually drilling down by end markets. So obviously, we're always focused on focused on collections, but I would say, we'd <unk> a lot more focused on collections in the last four or five months than we had very good data on that I would say.
There are two countries that stand out as collections being lumped materially lower than elsewhere, and those are France and to UK and part of it is that the government has gone out there and basically said the you know you don't have to pay your rent and ER and so a lot of people are.
A lot of very healthy companies I mean household names are just choosing not to pay their rent for now, but the ultimate collection of those numbers of those rents are not subject to those regulations and we believe will collect the vast majority of them, but if you.
Take those two markets out, but Asia is on the other side, we have no deferrals or no late payments almost or no default I can speak up and in Asia. So if you throw at all in the Blender and the numbers are very comparable between the U.S. there within a couple of hundred basis points between the U.S. and the rest of the world and with the.
With the too that I mentioned being the meaningful I Didnt you should.
I think that was the last question. So I'm really want to thank you for your participation sorry about delta logistical glitches today, but that's where we're world we live in and we look forward to talk with you export take care.
That concludes today's conference call you may now disconnect.
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