Q2 2020 Eastgroup Properties Inc Earnings Call
Good morning, Thanks for calling in for our second quarter 2020 conference call.
We appreciate your interest Brentwood, our CFO has also participating on the call.
Since will make forward looking statements, we ask that you listen to the following disclaimer.
Please note that our conference call today will contain financial measures such as you know why.
That are non-GAAP measures as defined in regulation G.
Please refer to our most recent financial supplement into our earnings press release.
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Please also note that some statements during this call our forward looking statement as defined in within the safe harbors under the Securities that 1933, the Securities Exchange Act of 19, Dirty Gore and the private Securities Litigation Reform Act 19 anytime.
Forward looking statements in the earnings press release, along with our remarks are made as of today and we undertake no duty to update them, whether as a result, new information future or actual events or otherwise.
Such statements involve known and unknown risks uncertainties and other factors, including those directly and indirectly related to the outbreak of the ongoing concern of ours.
That may cause actual results could differ materially we refer to certain of these risks in our FCC filing.
Thanks Cana good morning. Thank you for your time, we hope everyone and their families remain well and out of Harm's way I'll start by thanking our team they've done a great job transitioning operating strategy quickly.
And doing so while working remotely.
Second quarter results were strong and demonstrate the resiliency of our portfolio and of the industrial market.
Team had a solid quarter producing such that as.
Funds from operations came in above guidance up 9% compared to second quarter last year. This March 29 consecutive quarters of higher AFFO per share as compared to the prior year quarter truly a long term trend.
And for the year FFO per share is up 9.5%.
Our quarterly occupancy was high averaging 96.6%.
Leaving us 97.5% leased and 97% occupied at quarter end ahead of our projections. Our occupancy is benefiting from a healthy market with accelerating E commerce and last mile delivery trends also benefiting our occupancy is a high year to date retention rate.
84%.
Releasing spreads were strong for the quarter at 13.8% gap and 7.9% cash.
To date leasing spreads are higher at 20.1% gap and 11.5% cash.
Finally, same store NOI was up 4.1% for the quarter and 3.9% year to date and.
In sum during an extremely choppy environment I'm proud of our teams results.
Our strategy remains one of maintaining occupancy and cash flow with an eye on liquidity.
I'm hopeful our strategy will shift again later in 2020 to focus on growth.
In terms of liquidity I'll think Brad and our finance team at quarter end, we had the highest availability on airline in the company's history and one of the lowest percentages drawn on our line in decades.
Brett will give you color commentary, but our upcoming debt placement further improves our liquidity, while lowering our cost of capital.
I'm Grateful we ended the quarter generally fall at 97.5% leased.
Well the Houston, our largest market at 13.8% of rents is 97.9% leased has roughly a 4% square footage roll through year end and a five month average collection rate on rents of over 99%.
My five much use being the length of this pandemic today.
Company level rent collections remain resilient for July thus far we've collected 95% of rents.
The unknown is when the economy truly reopens, how fast it will reopen in which cities and are there any shutdowns remaining we and everyone else simply have less clarity the normal even several months into this.
Well speak to our budget assumptions, but I'm pleased with our second quarter results in a realistic plan.
We can reach 528 for share NFV, FFO or only two cents shy of our original pre pandemic expectations.
Towards that end, we've thankfully also have the most diversified rent role in our sector with our top 10 tenants only accounting for 7.5% of rents down almost 200 basis points over the past few years.
As we've stated before our development starts are pulled by market demand.
With the shutdown, we reduced projected 2020 starts to reflect first quarter actual starts.
As well as some level of pre lease conversations underway.
In other words, we're not forecasting news spec developments at this time.
We're also looking at acquisitions and value add investments in the same light.
Given the positive long term distribution trends, we foresee we're working on several land sites, which we view as valuable development parcels when the economy stabilizes.
And in the meantime, we view operations working with our tenants and maximizing liquidity is the key goals until we reach the next market phase.
And now Brent will review a variety of financial topics, including our updated 2020 guidance.
Good morning, our second quarter results reflect the resiliency of our team and strong overall performance of our portfolio amidst unprecedented conditions and centsone per share for the second quarter exceeding our guidance range at a dollarsthirty three per share and compared to second quarter 2019 of $1.20.
To represented an increase of 9%.
The outperformance was primarily driven by our operating portfolio, maintaining occupancy and collections better than we had estimated in April which was the initial onset of the pandemic.
I will send her my comments around our capital status Red collections, and deferment requests and assumption changes that increased the midpoint of our AFFO per share estimate.
During the second quarter, we raised 30 million of equity at an average price of 123 per share and earlier. This month, we agreed to terms on two senior unsecured private placement notes totaling $175 million.
100 million note has a 10 year term within fixed interest rate of 2.61%.
Second the 75 million on a 12 year term with a fixed interest rate of 2.71%.
We anticipate closing those nodes in October.
That activity combined with our already strong and conservative balance sheet has kept us in a position of financial strain, which is serving us well. During this time of uncertainty our debt to total market capitalization is 21% debt to EBITDA ratio is 5.1 times and our interest in fixed charge coverage.
These ratios are over 7.2 times.
Our rent collections have been equally strong we have collected 98.1% of our second quarter revenue and entered into deferral agreements for an additional 0.8%, bringing our total collected and defer to 99% for the second quarter.
As for July we've collected 95.5% of rents, thus far and have entered into deferral agreements on an additional 0.7%, bringing the total of collected and deferred for the bonds to 96.2%.
Slightly ahead of June's pace.
Last April we reported a 26% of our tenants had requested some form of rent from it and the three subsequent months that is the only reason to 29%.
We have denied 79% of the request or in various stages of consideration on 8% and have entered into some form of deferral agreement with 13% of the request.
The red deferred thus far totals $1.5 million, which only represents approximately <unk>, 0.4% of our estimated 2020 revenues.
As we stated last quarter, the depth and duration of the pandemic and its impact on the economy is on determinable.
However, the immediacy and degree of potential tenant financial stress and loss of occupancy we had budgeted for an April did not occur in the second quarter as a result, our actual performance and revised assumptions for the remainder of the year increased or F. <unk> earnings guidance by 2.1% from a midpoint.
517 per share to $5 and 28 per share or 6% increase over 2019.
Among the changes were an increase in average occupancy from 95.2% to 96%.
The decrease in reserves for uncollectible rent from 3.8 million to 3.6 million.
Note that the reserve for potential bad debt for the third and fourth quarter of 2.4 million is not attributable to specific tenants rather it is a good general assumption that there'll be some companies who succumb to the disruption in the economy caused by the pandemic.
Other notable revisions include a lower average interest rate on new debt and the increase of equity issuances by 95 million.
In summary, we were very pleased with our second quarter results. We will continue to rely on our financial strength the experience of our team and the quality of our portfolio to navigate is through the remainder of the year now Marshall will make some final comments.
Thanks, Brent and closing I'm proud of our second quarter results. We said the past few years, our fear wasn't shallow bay oversupply as much as a black Swan economic events.
You don't want either but now we have just that.
Company and our team have worked through these before and while different we're working through this one too.
As the economy stabilizes, it's the future that makes me the most excited for eastgroup.
Our strategy, which has worked well the past few years.
Well come out of this time damage with trends that we're hearing of including companies carrying additional safety stock inventory shopping habits that have changed accelerating the consumer to E commerce.
New industrial users as a result of the shopping habits and increase U.S. manufacturing or near shoring and Mexico. Meanwhile, our bread and butter traditional tenants will remain and continue needing last mile distribution space and fast growing sunbelt markets all of these along with the.
Combination of our team.
Our markets and our properties have me optimistic about our future.
Well now open up for any of your questions.
And at this time, if you would like to ask your question. Please press the star them. One on your Touchtone phone you can always remove yourself from the Q by pressing the pound key.
Once again star in one for questions. We do ask that you are limit your questions to one and one follow up make Q with any other follow ups.
Thank you.
We'll take our first question from James Feldman with Bank of America. Please go ahead.
Good morning, guys. This is all this on for Jamie I'm just a quick question. If we can just drill into Houston and what makes the you know sort of your rent collections there stronger relative to the rest of your portfolio and then number two any outlook you can share on supply demand you know rate changes that you're seeing.
In your sub markets relative to the rest of the market that would be helpful.
Good morning, I want to sell as Marshall I'll take the started that in Houston.
No, but it's probably a couple three things one and it's always hard to quantify from outside the we have they were they really good experience team that's working well together for a long time in Houston.
And then we've Kinda then Houston has a downturn about every few years. So they've got a lot of experience and so they have done a good job and been very diligent about chasing down tenants you know maybe comparing it to some other parts of the country. It really probably focusing out west to taxes is probably more favorable market in terms of land.
Board rights when tenants don't pay and things like that so that ability to long someone out or really.
Just to kind of home that negotiation family legitimately helps with our collections and Houston and ends of the third thing I think that sometimes gets lost in the kind of the high level market overview. So when we shrunk our size our investment in port in Houston from a little over you know kind of below 24.
[noise] down below 14, and still dropping today, what we sold were older Kinda standalone buildings, and what we've kept up or really the buildings. The east group has developed and are in box. So the quality of what's left and this this statistic is a couple of years old by now, but I remember as we were.
Selling the average age of what we were selling was in the high Thirtys like 38 years is what I remember in the average age of what we still had was eight years. So it's a.
Fairly say new.
Highly functional well located in a eastgroup developed type parts of what we've got left and so I think that attracts cole credit quality tenants that I think even if they're smaller space is one of the things it's kind of gotten along the last few months on US is you know a general kind of painting of okay.
This group has smaller spaces that must mean mom and pop tennis, and there's a lot of national and public or private well capitalized comedies that need last mile space and so you're seeing that our company collections and then on Houston team has just done a great job and going after it to be over 99%.
The past five months solid net surprises me, how well we've done and fingers crossed all well keep after that.
In terms of any specific submarkets, it's been pretty broad bras broad brush the trouble we've seen within our tenants. It's not so much size assays as to what they're doing we know its markets that concern us a little bit certainly there's there's houston.
Because of the supply, although I think people get lost and how much of that is most of that as big box not shallow day and then the other statistic, which gives us some comfort.
18.8 million square feet in Houston under construction, it's roughly 50% leased 49.2% leased for CVR age. So most of that space is accounted for that leaves you know a little over 9 million square feet, but absorption year to date has been over 6 million square feet, you know even during the pandemic in Houston.
So hopefully we'll work our way through that is a market and then a lot of that thankfully the majority of it by far is not shallow by.
Trying to think of any specific markets. The tourist markets concern me a little bit you know just because like a las Vegas, we need the strived to be open tourists to be coming to town, it's not a large market for us, but you know that certainly helps our our tenants need the economy to be open and the same with orla.
Endo for example, Tampa has been a very stable strong market. We've had some great releasing spreads there and things like that and Orlando Weve hung in there about way and I guess, Disney's reopen now, but with Disney and Universal Studios and convention slowing down in Orlando. Those are the markets way said have been has a little harder.
And then a Dallas for Charlotte or some markets a little more stable like the Austin for example.
Thank you that's very helpful. And then just one more question.
For Marshall or Brian.
On what you were thinking when you when you lowered guidance and with one Q release, and then obviously increasing guidance now what did you see from tenants then versus now is it that the markets have reopened is it that.
Some of those industries that you thought would not survive or actually driving what exactly are you seeing that's different quarter over quarter.
Oh taken the brand jump in a below kind of try that.
Because we pulled together you know to us as we've kinda said this.
This shut down really started I it was a.
Okay curtain coming down and it is not yet Friday March 13, that's all I things came the just a dramatic shocking style and then a month later as we were pulling together our guidance.
You know one you're just kind of watching the news watching the economy, its and all working remotely as we were pulling this together, we just said with this kind of shutdown, it's going to really in that our tenants and and people aren't leaving the homes. So the ability to backfill space is going to be very difficult what.
Surprise also need to the good is just how critical our space is too large tenants even those that have been in trouble some of our bad debt, we're still working with those tenants to try to figure out ways, they're trying to stay in their size forgets Reagan investor onboard and do things like that so.
I've been pleasantly surprised and then.
We are saying shutting down it is accelerated as people rate E. Commerce. So much so there's more and more companies with social distancing that that has led to incremental demand.
As you know as the Amazon as the homebuilding E commerce tenants have really grown pretty rapidly this year and continue that and we've picked up probably our market share of that so probably seeing that happened that quickly surprised me you think it makes sense that it's going to happen I, just we probably didn't expected to happen as fast as it.
As it did and I'm really surprised at an average occupancy for the quarter at 96.6% is the same as last year in last year was a record year. So if you asked me in April odds of occupancy staying the same I wouldn't I would've been wrong, but I would have I wouldn't bet you a lot and it was going down and.
And thankfully it and hung in there Brad any color commentary, let alone that's no I think that's right own I mean, the reality is an April it was so saying, we just didn't know and now we have a little bit of data and like Marshall said I'm very pleased with how everything has held up and you know there's still some uncertainty even maybe towards the end of the year, We've got a few things down.
Build into guidance to is definitely a just for that but yeah I would say in April. We just were so early into it you just didn't know when you felt like you needed to do something to adjust with a lack of any.
With any knowledge of what might happen. So again, we're very pleased with where we are elwes.
Great Congrats on the quarter gosh.
Okay.
Our next question from Daniel Santos with Piper Sandal Sandler. Please go ahead.
Hey, good morning, Thanks for taking my question I guess the first one day wondering if you could give some more color on on why you're speaking but.
<unk> guidance for occupancy in the back half of 2020, just given the first half has been better than expected one would expect that the second half would kind of continue that trend just some color on that would be helpful.
Yes, Oh, we hope you're right I mean, we arent dos and today thankfully it at least speaking it kind of here at the end of July you know, maybe one more month into it was.
Since quarter end, we've we've hung in there. We saw just is this you know the economies Oh Reos I'm not exactly we owe them you know restaurants at 50%.
I don't know the things won't get shut down again different places, where do you hold up in a different design stage different cities shutting down bars shutting down. This you know that jones or different things that I think back overtime has too.
Stress, our 1600 tenant has to stress our tenants.
Balance sheets over time, so I hope you're right I hope, we're being conservative, but we thought there we're not we're not out of this yet and it is the most.
Build upon each other it's gone to the a drag on some of our tenants. So as we it's not anything specific there's not any you know any one market any two or three tenants specific any large ones that really drive. It is just more of a I'm not sure I don't believe we're through the end of this and over time more of our tenants have to get.
Almost kind of pissed off by a weaker economy.
Got it that's helpful. And then my second question is.
He is on distribution and how much would you say I appreciate the comments.
And Rob from E Commerce, how much would you say cobot has really changed distribution in my mind permanently versus something you know just a temporary change between now and when things go back to quote unquote.
Okay. Good question I mean I think.
Despite the you know we then we read about in terms of how much picky retailer almost as much less than Amazon and things that.
Well the numbers.
Seem to E commerce growth in terms of retail sales force was in the high teens and it jumped up into the low thirtys as a percent growth.
And that people were expecting it to moderate back and you know maybe the twentyth.
I don't see things, we'll do that so the way they work or some other things, we've read and actually saying that this shutdown has demystify the E commerce for a large segment of the population. So I think the way people shop, and maybe the way they live to which I think will help us overtime.
I'm in Sunbelt markets live and work.
I think those trends have started this is all accelerated that they were all coming this way E Commerce room, all small was coming out like.
Tony Relocations people relocating to in a fast growing sunbelt markets was happening, but I think this will.
The fuel to the fire coming out of this and it really willing celebrated almost you know the other side as you see shopping malls die I think they were dying, but this is somebody said this is used in Asia for some of them. It's pushed ahead two or three years.
Got it thank you.
Thanks, Dan.
So next to Manny Korchman with Citi. Please go ahead.
Good morning, Katy Mcconnell on for Manny can you discuss the potential impact of the PPP program drilling after your tenant base and rents to rank collections increased proud that you might be factoring into your estimates for the balance of the.
Yeah, Hey, this is Brent good morning.
Obviously, we have had some direct feedback from tenants that have initially put in request and then we got feedback later, hey, we were seen some PPP money and got caught up and so certainly we've we've seen some tenants benefit from that it's hard to tell out of our 16 to 1700 customers exactly to what extent that's held we did do.
A cross reference of our tenant base to the public list of companies that have received PPP money. We used 150000 sort of as a minimum. So we were looking at written people that received 150 or greater.
And it appears that somewhere around 20% of our tenant base did receive from some form of PPP money, which seems to make sense to what we expected I mean, we as Marshall mentioned, we have only had 29% of our tenets ITSM and most of that 26% of the 29% occurred back in April requested some relief.
In terms of you know whether they extend to pregnant that'd be helpful. I think anytime you.
You know put money into People's pockets, certainly that would be beneficial I think.
Yeah, 80, plus percent of our tentative have shown a good resiliency without that so you know, it's really not a lot weakens and controlling that certainly if it's part of the program. We would expect that would be incrementally better, but but if they don't our tenant base you know been longtime customers of ours and will.
Continue to work with them, but it's hard to tell what impact that might would have weather does or doesn't happen.
Okay. Thanks, and then maybe following up on he then for the leases expiring this year.
How can that your expectation for retention.
HM.
Sure.
The good news I think that's kind of given the choppy environment, what we've got rolling between now and you're in is only about 4%. So not a time and today the company level. Our I retention I think this uncertainty has led our tenants to renewed you know usually your thing every people working on growth.
And we were talking about kicking off newbuildings here and there in certain cases and they've pushed.
Understandably put those on hold until the economy feels a little more solid.
Our tenant retention as a company is about 80 is 84% year today and if you were building your model on the East grew from scratch I would tell you 70% is usually our long tournament and most everybody else is long term retention right. So uncertainty has led to a higher retention rate in Houston and in other markets.
My guess is we have more rolling and 2021 as the economy stabilizes hopefully I think was well have you know probably keep that I'm working our way through rents it's come down in Houston.
Probably 5% to 10% as a market. The good news is anything that you had that maybe two to three years. Those that are coming up are expiring, they're going to be anywhere from three to five years. So there's still embedded rent growth there, maybe it's down and I think as with supply stopping really across the country.
For the most part I think because industrials held up supply will probably pick up a little more in the back half.
Of the year, but I think Houston, we'll work our way through those and I would expect probably 70 plus percent retention rate and probably at all the start hopefully things normalize the back half of 2021 and things like that but nothing alarming today.
Okay, great. Thank you.
Okay.
Our next question from Vikram Malhotra with Morgan Stanley. Please go ahead.
Hi, this is well known for background or not on the optimum corridor I'm Jeff.
Could you provide a little bit more color on your expectation for development start I need said, but you're not going how many teachers that development starts, but given that you're confident on that on the outlook South Korea wide why not no question about men 11.
Our and good question and probably as we think about almost if you divide the second half of the year in and of course really into another now we had knows we stopped our said starts because the economy was so uncertain in second quarter were feeling better about things are those still.
Cautious here in late July probably will not have any starts in third quarter and then as we roll into fourth quarter. There are some you know even between third and fourth quarter. There are some pre leased conversations were having where we would you know.
If we get to lease signed we would build the tend to build the building for that tenant and we have a number of proposals out so that.
Probably the biggest part of the difference on the site development, which is about 70 million in stars between now and you're in and probably what we are thinking about a little bit definitely there markets like Charlotte's Phoenix northeast Alastair several markets, where I think.
These are normal economic times, we already would have started that next phase and that's a couple of buildings within an existing bar, but we've really put those on hold and probably was giving us a little Paul's not you know is really watching our own portfolio, but also watching the market. We've said thankfully, where you know 97 plus percent leased.
But delivering that next building you want to make sure. Your peers are also pretty full that we really saw construction prices are dropping with the slowdown because not only is industrial slowed down the hotels retail office Entertainment type development has really stop so we are saying you know the benefit of.
Waiting in terms of construction pricing a little bit.
And then we also wanted to just see well you know what the vacancy rates in our you know kind of submarket by Submarket, how those wells, which of our tenants what do they can see we may we may get within our own portfolio, but thankfully, we've not knock on wood seen much of that today.
And just a follow up on the market it looks like.
Core market operating simplistic, but run for a little bit week or at least in probably analyze it so that weaker and the California. Michael can you comment to talk about what was going on there a lot Gordon.
Oh last quarter were one I can bid.
It was weaker for example in San Francisco and there.
Good property in Hayward, we've got a a vacancy there. So it's been it was vacant the entire quarter in last year. It was full so it's really a drop in occupancy. The good news is we haven't agreement.
We'll see it comes back to sign that we have only we haven't agreement with a process in a lease outs or for review and hopefully signature there.
In probably the same thing just kinda looking through the quarter year to date Fresno, it's not a large property there it's up a part that we've owned in Fresno since the late Ninetys 400000 feet and just a little bit of a pick up and and vacancy there, but the biggest one and we should get that's still really strongly leasing spreads.
As you look at kind of in San Francisco, and you know mid 50 percents it'll be one of those times faces when we get it relays. It's just in its taken a little bit longer I would say that space the markets.
East Bay, Kinda Hayward area towards Oakland, and San Francisco's, 2% vacancy sub 2%, but one of our markets. It's been shut down probably a little bit longer being California than say, Georgia or the Carolinas and so it's it's drug that they can see out a little bit longer and that that hit us.
And second quarter there.
Great. Thanks, so much.
Yes.
Next question from Michael Carroll with RBC capital markets. Please go ahead.
Hi, complete sector mute function on your phone.
Yes, sorry.
And Mark can you provide some color on your comments that the company's playing on increasing safety stock I know that's been a conversation that's been going around now for the past couple of quarters.
Heavier tenants indicated that they plan or need the whole morning, more inventory to sustain some of these potential supply chain shocks I mean, they voice that directly do you yet.
It's probably it's more of it certainly it's more us reading and hearing about it and hearing it at conferences.
In conversations with brokers than direct I would say you know kind of between you know I guess, a tricky far from April to now we've been in front of our tenants less than typical you know you may have phone calls and things, but you're certainly not traveling and walking through spaces, where you kind of get a sense for how they're using it but what were hearing.
Hearing and then you know hearing directly.
Tennis, and then more through brokers and other people. It's just because people got call. So short sourcing from China and had less inventory that they're going to need to carry more inventory and probably carry more inventory is another brokers. Once said do us any time when someone hits quit.
And when it gets delivered to your doorstep at speeds that that Oh, that's where the world's going into that excites us given our type properties and how close we are two rooftops and typically higher in better educated rooftops more E commerce oriented so I think coming through that companies are.
Before it was on logistics center and they'll still have those on the edge of town in Chicago, and South Dallas, South Atlanta that now there need to carry more and more inventory near rooftops to get you know when you go from Amazon, we're delivering in two or three days to Amazon Prime and Amazon Prime now so.
I think that that in itself is leading to more inventory and where you know thinking but I did read where I'm trying to think of which currently is relocating already craftsman tools from China to Fort worth which is one of our market. So they'll manufacture. There. So were you know some of these long term trends you're seeing maybe the.
We use a broker phrase green shoots of that but I think it's pretty early on but hopefully it continues to come our way.
[laughter], how broad based do you think this will be among tenants I mean with a larger tend to be the ones, mostly driving the higher inventory or do you think smaller tenants will need to do that too and I guess and if so they do hold more inventory where they go to hold it out I mean is it going to be at the end in fill shallow they space the tab or is it going to be more on the outskirts.
So if somebody's major cities.
Probably probably little bit both I mean, I think we you know early on in the.
And this is kind of this being the downturn, we saw the national tenants still being the most active ones kind of our conversations home depot lows.
Wayfair tests, while some of those type of names been Alas 30, 45 days, it's been more local regional tenets, probably as the economy stays open and gets a little more certain it's nice to see those local kind of regional tenants start to be active.
I think though all need to keep more inventory or probably think about that they they probably had been inventory and their warehouse depending on how local regional I think it's the national comedies and I do think.
As we as we talk about like a lows in a home depot is so much cheaper for them to keep their inventory was then it is.
Strip Center type property, the large bulky items that you're not leaving your home wed.
That's where you would order washer dryer and it gets delivered somebody screw warehouse in Atlanta, or Tampa, or Miami, and that's cheaper than keeping it I'm only picking on them because they're Florida than say, a regency center that somewhere else in Florida or something like that so I think that trend.
Well keep coming our way because our answer probably a third to a quarter on a gross basis, what a typical.
Strip center retail rent would be so I think that's all coming our way and people will figure out you know just don't work on their supply chain and chipping away at cost and that pushes more and more inventory out away we've seen it out.
Thinking about Florida, where and it's another group, we're having conversations with Nike they've got space for for Nike and they're different brands with us and the it because it's cheaper to use US is back of store given all the you know the tourists and the outlet malls in Orlando They run hourly van services.
Back and forth to our buildings.
Yeah for Nike, what and Hurley and some of their concepts to continue growing and using our type buildings.
Okay, great. Thanks.
Huh.
Our next question from Bill Crow with Raymond James. Please go ahead.
Hey, good morning, congratulations guys.
Actual or a couple of topics that seem to surface pretty often I just wanted to get an update from you know.
Number one what are your tenants, telling you about their ability to source labor and the number two is just any color on construction costs. We noted the growth had been coming down or we actually seen material declines.
Construction.
Well, we've seen that show cost come down a good question. Good morning, Bill I guess backing up that.
We've seen a show cost on buildings come down you know a dollar $2 per square foot. So you know starts to be.
Meaningful number we said while rents it's kind of the rent growth as you know that at different times people thought nationally that rent growth would be flat for 2020, I I'm starting to think it'll pick off some of the back half of the ever given how strong you know as we can we talk to our fears and read their reports and things like that that I do think ran.
So maybe pick up the back half of the year.
[laughter] Labor certainly has picked up with the Onemain has two with unemployment it used to be such a big part of conversations of tenants of where if I come to this location, where am I going to source labor and type markets, and and especially tight construction markets where in a couple of cases.
The general contractor had since the site, where they were building our building so that they could lot of basically with lost the workers end because during breaks the competition would show up and trying to hire the workers are way. So that gives you an idea of how tight.
Labor laws and that was going on I don't know that that's completely stopped but I would think where unemployment is.
Labour and what we're hearing is labor is more available, but last certainly on construction, but a little bit less efficient and rightly so because of safety distancing requirements and things like that so weve.
We've kinda.
Continued our development construction on buildings, we have underway drug or hills, a little bit because prices were coming down and and we think rents will bounce back a little bit. So that's part of that you're trying to time when do you really start developing again in it and it's early and you know and it just depends on how you think the.
So you can get real nervous about thinking about kids going back to school and things like that about another shutdown. So we're we're being a little bit cautious about that.
Merchandising and land.
Development land.
Any indication that it is the competition for the land is easing a little bit or that.
More owners are looking to liquidate land in order to maybe pay for other other investments given this.
Economic environment.
Yeah, We got good question, we've not seen distress.
In terms of you know relist industrial assets, if anything it seems like demand may have picked up on land. However, it does seem like there's a little less there is less competition for land the prices have been sticky.
And part of my thinking has been land has been.
No one is when we met we admit it near eight last November we would have said our long term concern is it's awfully hard to find good industrial land sites in fast growing markets. You know that it's been so picked over and land gets priced out of range for industrial So we were trying to tie it up.
As long as the seller would let us have our funds go at risk as late as possible, but it's been happy and that we've been able and then some of its been in the press that to to tie up some contiguous land or in their us in Charlotte like our Steele Creek, which has been a very successful development.
Tie up some land and northeast Dallas, where we could continue developing a good part there San Antonio and so we've really and again contiguous land is I'm kind of thinking through our portfolio in Fort Myers, where were building that what would be the last building in a hard number eight building on a parking wear out of land and they were able to.
Source some adjacent land because there's maybe once you get that many tenants is we have there.
Really the next thing to do and it makes our development risk I felt like so much lower than maybe some of it appears as you're just waiting for one of your existing tenants to raise their hand, and say I need. Another 30 40000 square feet. So we'll we'll move you into building nine or 10 and back failure space at a higher rents. So we're trying to use there.
Entity to bolt on a little bit to some of our existing parks, whether it be Charlotte or Fort Myers or northeast Dallas or places like that where you can pick up land here or there and because we think coming out of this for the reasons, we talked about earlier, whether its E commerce or manufacturing or safety stock.
Or just relocation to sunbelt markets out of kind of mass transit markets in the northeast as those pick up the that land is only going to become more and more near and Dear. So if we can use this downtime to slowly and again the land gets a little scary, we want to at a reasonable amount of land. So that you don't get stuck hearing.
For too long, but that's how we're how we're thinking about it and.
Yeah, and unfortunately, when we talk to the brokers about distressed sell sell you know kind of Kid and say I'll put east group here into the east because I've got a or rolodex of names of people that want to buy distressed industrial right now [laughter] sure again, it all right well thanks for the color I appreciate I guess that's bell.
Next to Eric Frankel with Green Street Advisors. Please go ahead.
Okay. Thank you for work with me on my phone issues I'm, just a a an accounting question.
Can you your bad debt assumptions for the second half your can you express what that is going to be on a cash basis.
[noise] Hey, good morning, its Brent.
You know we wouldn't know till it occurs what's been happening through the first two quarters, it's probably been running probably two and a half the one straight line versus cash. So so far out of the 1.2 million or so for the year to date or just over 300000 of that about 325000 that has been.
Cash.
So the cash component of it will be.
Just like it's been we would anticipate being similar to where it would be a smaller percent relative to straight line.
The 2.4 million, we have 1.2 per quarter.
As I mentioned the lead and that's just a general overall.
You know bad debt allowance not specific to tenants and we really don't you don't have that necessarily broken down we do some internal things, but it'll be like say I would expect whatever we have a curve, we certainly hope that proves to be conservative, but whatever it. It comes to be I would say it'd be two to three times, probably greater on the straight line side versus cash.
Cash.
Okay. That's helpful. And then I think Mark can you kind of express isn't a couple other ways, but maybe just to clarify specifically your leasing this core or the average lease term was a little bit shorter than it is the last few years. So that just based on a little bit of certain can't tenants as their growth plans of installed so I think.
You're down to roughly three and half your 0.8 years or so I leases. This quarter that is that a trend you expect to stay do you think that will that will go back to work in the last few years.
Good good catch it is a little bit down it's been there before you know kind of late.
16, like 17, we've been kinda around that four range, it's not dramatically down, but a little bit you know wouldn't shock me given the uncertainty for third quarter to stay there and.
As the economy gets a sound footing I think then we go back over the fours, which is where its traditional kind of for one to four and a half that type thing. So I think it's.
Kind of again, a good catch I think it's more uncertainty in the market and we'll do a three year renewal because we're not sure and just stick where it is but I would it.
Expecting this is me estimating that it would it would normalize hopefully by fourth quarter first quarter next year pending on how cold it plays out.
Thanks, I thought a final question just related to kind of what you're seeing on the last mile demand from how much of this last night. The man is as you're describing with your your Nike Daniel just like store replenishment versus actual customer delivery or delivery individual consumers.
It's mostly customer related it's it's usually that we're going to ship out of an east food building rather than.
Our retail store, where guests are the phrase I've heard some some of our customer uses we used to have store level inventory and now we've moved a market level inventory, so that by and large most of it probably store level storage, where here where your that back of house. There a few examples of it but that's that's.
Small exception.
Well thank you.
Sure.
Your next to Greg Norman with Keybanc capital. Please go ahead.
Hi, guys. Marcia you mentioned, you know Houston rents are down 5% to 10%, but are you seeing any kind of market rent weakness outside of Houston or significant rising concessions across any or markets.
No. It could good question, Craig and not really I mean, where we've seen it probably not on renewals those have stayed pretty consistent you know the.
All of our tenants you know just about everybody has a tenant rep broker and where it's typically been into development pipeline or where there's vacancy where you'll get you know, it's usually you're about rounding third base I'm getting a deal done and they'll ask for a month or two a free rent.
So we've seen rent free rent grow upward, though you know the rents have been pretty stable. There. The annual increases have been pretty stable, where there has been a a little bit market movement as tenants realize there's not there's not as many tenants out in the markets a free rent could could chip a little bit rather than two months on a longer term lease maybe though.
As for two more or three more and will settle somewhere in the middle but outside of Houston Thankfully rents have been it's probably leveled out but not gone backwards.
And we heard from some other companies that maybe there's been a a trend to try to push bombs higher or have you guys. You know pre Cove is where you part of that trend to try to get escalators into that three and a half range or have you guys kind of where where's your aspin on that side of the lease equation probably.
You know I, usually though the bid here the space and the longer the term.
Element to it makes sense the only negotiate those bumps probably closer to a we'd love to go higher but we were probably typically have been around that two and a half two to three and if we can go higher than that we we would and again I guess, that's where we're probably would probably bowls down between the two brokers have everybody has agenda.
Broker and you're on a spreadsheet comparing it versus your peers. So probably heading into this we were we were trending higher but not not materially higher in it and it's really a case by case basis, and if you do get to a 10 year lease or a bigger space those tenants are going to push back pretty hard.
And that's going on and they're going to get closer probably the two to two and a half rather than 3% bumps.
Okay, and then just one last one I apologize.
If I Miss this but just looking at kind of the monthly collections here. It looks like there's been a marginal fall off as you get you know further away from April I'm. Just curious is there anything going on there or is it you know what's driving that and also I mean your portfolio has been a mark instead of you know.
Previous the started this kind of more insulated from the impact of covert versus the northeast markets and maybe you know more on the west coast or are you seeing a an uptick in deferral requests as P.P. It often you know maybe cove, it's kind of impacted communities a little bit more.
Yeah, Greg Good morning. It you know I'll answer the second part first we have not seen an up tick in deferral quest in its actually gone the other way the deferral requests thankfully so knock on wood here have really trailed off.
Our guys were and have a process, where we're getting at least weekly reporting from each asset manager in the field and four maybe three or four weeks running now a lot of those update to basically been no new update meaning theres been no new requests and so that has certainly trailed off significantly.
They are we're very pleased with where the collections are and you can see we've deferred very little our collections have remained high or teams worked hard yeah. There's certainly has been as you mentioned a.
Minimal decline month over month.
That is very fluid you know July we've got reported here 95.5, an even since we put the print on this yesterday. That's now 95.9, so each day all of those numbers literally change I think the deeper we go into it obviously the the opportunity for that too.
Pressure certainly there but.
On the whole or it's just been you know the one sort of group of tenets that originally asked for some assistance that we've had to keep a close Ryan but the.
Vast majority of our tenants have continued to you'll maintain hang in there and pay so it's simply keep an eye on but it's where we are in those high ninetys it's not.
Yeah, we don't have any alarm bells or anything going off at this point for sure.
That's how the maybe a slip one more and what's your exposure to brick and mortar retail and and you know apparel type tenants.
Gun doing for memory I know, it's funny, we had good questions about retail a couple of years ago, and we would say, it's not that great, but it's actually grown over the last few years again, I think with E commerce as we.
Between the Wayfair the lows the home depot.
I can think of we have cons in Charlotte almost there's not much. We've we've had nordstrom is a tenant for over 20 years in Orange County. So it's you hear in there, but we really don't have you know, we we don't have a big JC Penney warehouse or you know Tuesday morning, or I'm trying to think.
Good different people that we've got some spots here and there we've got Nike in Orlando, but it's in three different locations within apart because it's they're different brands. So no we didn't see the or anything.
Oh, Yeah, no I can't think of anything with.
Sina brands or some of those since since I left glimcher I don't know.
[laughter] refresh our memories.
I think you guys.
Greg.
Our next event caught culminated with Mizuho. Please go ahead.
Hi, good morning.
Just wondering if you can comment on some of the movement in Houston occupancy during the quarter.
When I compare occupancy at the end one shoots that provided in the June 1st business update and then she Q. It looks like it declined from 90 Sevens 97, and then tick back up to 97, nine and I asked two questions around that was that increase in gene driven by the we signed with agility in Houston, we now.
Sure in your top 10 list and as a follow up.
That initial occupancy decline in April and May help explain the near 100% collection rate in Houston in seems to 20, as maybe some weaker or more challenge tenants vacate space.
No I mean, good good good I just was the number of tenants Julie was.
Signed and it's really more delivery and then taking occupancy of the newbuilding. So that's when they jumped to good good thought into our top 10. They took a couple of buildings it's up.
Global third party logistics from often our world Houston parts of that move them into our top 10, you know we have had some instances, but it's really all complement or San Antonio team, where we've had some problem tenants, where they've been able to negotiate getting those tenants out in backfill, but Houston.
I think it was just collections and really kind of organic movement of tenants in our occupancy and always in any market kind of ebb and flow a little bit unless it's one of our smaller markets, where probably fewer moving parts that with Houston with five and a half million square feet, there's always someone kind of come.
Coming and going almost like an apartment complex if you could think about that.
Agility was really more delivering a newbuilding and then taking taking occupancy of that building as well move them in.
Thank you.
Sure.
It appears we have no further questions I'll return the floor to our presenters for any closing remarks.
Thank you everyone for your time, Thank you for your interest in East crew.
Brad Stacy Tyler and I are all certainly available for follow up questions. After the call and hopefully look forward to seeing you all in person again, one of these days whenever the world's allows us to take care and thanks again. Thanks.
And this will conclude today's program. Thanks for your participation you may now disconnect every day.
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