Q3 2020 Prologis Inc Earnings Call
Operator.
Today's conference is scheduled to begin at approximately two minutes until that time, you will again be placed on them you for cold. Thank you for your patience.
[music].
Welcome to the pro largest Q3 earnings conference call.
My name is Carol and I'll be your operator for today's call.
At this time all participant lines are in a listen only mode.
Later, we will conduct a question and answer session.
To ask a question during the session you'll need to press star one on your telephone.
Also note this conference is being recorded.
I'd now like to turn the call over to Tracy Ward Senior Vice President of Investor Relations Tracy you may begin.
Thanks, Carol and good morning, everyone welcome to our third quarter 2020 earnings Conference call.
Supplemental document is available on our website at her largest dot com under Investor Relations.
Like to state that this conference call will contain forward looking statements under federal Securities laws.
These statements are based on current expectations estimates and projections about the market and the industry, which is the largest operates as well as managements beliefs and assumptions.
Forward looking statements are not guarantees of performance actual operating results may be affected by a variety of factors.
So those factors please refer to the forward looking statement notice in our 10-K or Sep filings.
Additionally, our third quarter results press release, and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures and.
And in accordance with Reg G. We have provided a reconciliation to those measures.
Good morning, well hear from Tom Olinger, our CFO, who will cover results real time market conditions and guidance.
Hamid Moghadam, Gary Anderson, Katyn, Mike Curless, Ed Nekritz gene Reilly and clean.
Well here with us today and with that it's my pleasure to turn the call over to Tom Tom We think again.
Thanks, Tracy good morning, everyone and thank you for joining our call today.
Third quarter results were strong as the team on the ground executed extremely well in this current environment.
Demonstrated by our operating performance and robust capital deployment activity.
Our results continue to prevailing market conditions have upgraded our outlook.
Starting with our view of the market or proprietary data revealed that operating conditions are meaningfully better than they were 90 days ago and as a result, our earnings are now ahead of pre corporate level.
Good for watches Ivy I activity index rebounded sharply to more than 59 in September.
Our long term average and up from 50 in June.
Actualization, which is based solely on data source from our customers was 84% at quarter end. It indicates our properties are returning to near peak capacity.
On a skies adjusted basis, we signings were up 31% in the third quarter and up 4% year to date.
Progress continued to make decisions faster than ever with lease gestation less than 50 day.
Proposals remain at healthy levels up 3% sequentially and up 12% on a year to date basis.
The positive momentum has led us to raise our market forecast for 2020 in the U.S.. We now estimate net absorption of 210 million square feet and completions of 295 million square feet each of approximately 50 million square feet from our prior forecast net.
Net absorption in the quarter was robust at 65 million square feet pointing to a very healthy finish to the year.
We've also upgraded our year end vacancy forecast for Europe, and Japan to 4.3% and 1.3% respectively noted.
Notably vacancy in Tokyo reached an all time low of 50 basis points and rents are growing as a result.
As we look to space size demand broadening across segments. This quarter to include 100000 square feet and above space.
Space is under 100000 square feet in several markets, notably the San Francisco Bay area have lagged the other segments sizes in both occupancy and market rent growth.
For customer segments demand is also broadening and diversifying our portfolio E com.
Commerce continues to grow representing 37% of the new leasing in the quarter well above its historical average at 21%.
The dramatic structural shift to online shopping is generating demand in three ways first a wide range of omni channel and pure online retailers are growing and while Amazon is very active particularly with build to suits. They represented just 13% of our new leasing second.
Second Threepl is represented more than a third of new ecommerce leasing in the quarter a record as customers raised to augment their fulfillment networks and third many of the parcel carriers are also expanding their networks.
Our other segments represented 63% of new leasing in the quarter. The most active segments support essential industries, including food and beverage healthcare and consumer products.
Another new emerging structural drivers the need for resilience supply chains and higher inventory level.
Inventories to sales has fallen to the lowest levels on record and many customers are operating with a razor thin inventories we see.
We see signs that restocking process has begun.
Moving to our results, we had a strong third quarter with core FFO per share of 90 cents.
We outperformed our forecast due to higher NOI strategic capital revenue and termination fees, partially offset by slightly higher GNS.
Rent change on rollover continues to be strong at 25.9% and led by the U.S. at 30.7%.
Rent collections remain ahead of 2090 levels as of this morning, we've collected over 99% of third quarter rents and over 94% of October.
In addition, we've received a 95% of deferred rents due to date.
Bad debt is trending lower than forecast and was 43 basis points of rental revenues in the quarter. This was roughly half of what we had forecasted.
Our share of cash same store NOI growth was 2.2% despite.
Despite the impact from lower average occupancy and bad debt.
This speaks to the underlying strength of our rent change the primary driver of same store growth in the quarter and the long term.
Looking to the balance sheet, we continue to maintain exceptional financial strength with liquidity and combined leverage capacity between pro largest center opened in the vehicle totaling more than $13 billion.
We also continue to refinance debt Opportunistically setting records in the quarter for the lowest read and third lowest us investment grade 10, and 30 year coupons in history.
For strategic capital Investor demand is unabated, our team raised over $800 million of new equity this quarter and accused that are open ended vehicles currently stand at $2.6 billion.
Turning to guidance for 2020, our outlook continues to improve given what we see in our proprietary data our customer dialogue and lower bad debt.
While there may be headwinds until we put forward behind us our revised guidance range has taken that into account.
Fear the key components of significant guidance changes on an our share basis.
We're narrowing our cash same store NOI range to be 22.75, and 3.25% at the midpoint. This assumes a 25 basis point reduction of bad debt with a new range between 45, and 55 basis points of gross revenues.
Globally market rents grew in the quarter and we now expect growth of 2% for the year approximately 250 basis points ahead of our prior forecast.
After prioritizing occupancy for most of the year, we presume pushing rents and a handful of leading markets, including New Jersey, Pennsylvania, Southern California, Dallas, and Northern Europe, as well as the three regional markets.
On the other hand, we're still solving for occupancy in Houston, Denver West China in Madrid.
Our in place to market rent spread now stands at over 12% and represents future incremental organic annualized growth potential of approximately $450 million annually.
For strategic capital, we expect revenue excluding promotes to range between $380 million to $385 million.
The revenue growth for our business has been excellent with.
With a five year revenue CAGR, excluding promotes of over 16%.
Thats majority of this revenue was derived from recurring asset management fees from our perpetual or long life vehicles. When we look at multiples being ascribed to this business. Our view is that there are far too low.
For comparison public asset managers are valued at a multiple of more than 20 acts on far less sticky AUM with much higher for months.
For development, we expect to start $1.1 billion in the fourth quarter with the full year, ranging between 1.6 and $2 billion of $800 million from our prior forecast.
Build to suits for remained elevated and comprise about 45% of the annual volume. In addition by year end, we expect to restart about $180 million or approximately half of the development projects, we suspended in the first quarter.
At the midpoint, we're increasing both contributions and dispositions by $350 million based on our third quarter valuations and current market activity pricing for our properties is now pushing well beyond pre coded levels.
Taking these assumptions into account we are narrowing our range in increasing our 2020 core FFO midpoint, but four to how sense to $3.76 to $3.78 per share.
This includes 21 cents of net promote income which is up a penny from our prior guidance.
Year to date growth at the midpoint, excluding promotes its 13.7% while keeping leverage flat.
Interestingly, while there's been a lot of noise over the past seven months since the beginning of the pandemic. The net of it is we are ahead of our pre cobot earnings expectations today.
In closing our performance is a testament to the foundation, we've been building for more than a decade, our three.
Our three year earnings CAGR of 11% to outperform the other logistics reach by more than 500 basis points annually, despite a greater relative decline in leverage but.
The work that we've done to create the best in class portfolio and balance sheet is clearly paying off.
The business is proving to be incredibly resilient and is delivering exceptional growth, which we expect to continue with that.
With that I'll turn it back to the operator for your questions.
Thank you as a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from Emmanuel Korchman from Citigroup. Please go ahead.
Hey, everyone. Good morning, and afternoon out there.
Tom just in terms of collections, there, obviously strong and they continue to be strong, but there is a downward trend is there anything specific in those numbers that we should be mindful of or.
Anything you think might drive a quicker recovery there then.
We're looking for the amount.
Yeah, Manny collections have been excellent actually theres no downward trend if anything they're trending up if you looked at our collections today were at over 94%. This morning, when we had our call in Q2 July collections were at 92%. So were 200 basis points plus ahead of where we were.
Comparably were ahead to 2019 levels across the board.
And I think that collections are actually accelerating a bit.
From the last quarter, so I'm very very pleased with where collections are.
Our next question comes from Gerrick Johnson from Deutsche Bank. Please go ahead.
Hi, everyone two lease spreads continue to be robust, even as we progress through Cove at 19.
How do you view the pandemics impact on the portfolio in terms of rent growth. So when you look at the overall portfolio do you believe you could have pushed rents harder without the pandemic or has the pandemic, perhaps propelled rent growth and then lastly, do current rent trends have legs in your opinion. Thank you.
Hi, Hi, Derek it's it's a good question and one that we ask ourselves often.
But there is no going back and sort of playing playing that hand again, because when you're looking at.
You sitting there in March and looking at what could happen you make certain decisions I think generally we could push rents harder had known how this was going to play out and of course, we didnt.
I think that is gas in the tank for the next 12 months so.
We are optimistic about our ability to continue to grow rents and you know we kind of grew 15, 16% a year. So we were at quarter or two late on pushing rents by a little bit by the time, you work through that 15% and the little bit of rent growth change the numbers become miniscule in terms of what we may have.
And but whatever that was I think is is fuel for future growth.
[music].
Our next question comes from John Kim from BMO. Please go ahead.
Thanks, Good morning.
This quarter, you had sequential occupancy declines.
200 basis points in both Chicago and Houston I'm, assuming this is based on new supply, but just wondering if that's the case and also on the other markets, where you concern from a supply perspective.
Yeah, It's gene I'll take that others may made Taiwan.
If you extend it for sure it's going to face headwinds, there's a ton of supply in that market you guys.
No the story, there Chicago, we feel a little bit better about.
Actually that market's fairly strong in.
And elsewhere in the U.S. from a from a supply perspective.
Things actually look pretty good.
We have seen.
In this quarter a significant increase in absorption.
In a corresponding increase in supply.
But we're dealing in very low vacancy rates across the board. So we actually feel pretty good.
And in the U.S. Houston would be.
The concern on supply at this point.
<unk>.
Our next question comes from Jamie Feldman from Bank of America. Please go ahead.
Thank you Tom you talked about 13 billion or so of liquidity can you help us understand or.
Just think through what if there's any opportunistic.
Physicians out there and where you might be able to put some of that capital to work over the near term.
Thanks, Jamie.
Listen I think were the key for US is for an opportunity it's going to have to.
Expand our growth potential and it's.
When those things occur.
Things occur.
It's hard to to determine but we're always ready we always maintained significant liquidity liquidity. So when the time is right we're ready to go.
But we're certainly not seeing large portfolios on the market. These days.
Okay.
The pricing for our product is going to be well above.
Well above where we were pre covered so theres a lot of interest.
For product.
Our next question comes from Blaine Heck from Wells Fargo. Please go ahead.
Great. Thanks, Tom you noted that you guys are assuming starts of a little bit more than a $1 billion at your share in the fourth quarter.
Can you guys just talk about how much of those are built to suit versus spec and whether this is just you know pent up demand from from clients that didnt want to pull the trigger earlier in the pandemic or what else is kind of driving your confidence to start that much in the fourth quarter.
I'll start with that question I'll kick it over to Mike but.
If he is.
It's probably good to talk about spec development overall, and what the what I picture looks like.
So as a reminder, we suspended 16 projects in the spring.
18 markets and that was almost $400 million of activity and.
And through last quarter on what we expect in the fourth quarter will restart.
10 of those projects and about half that volume so were generally positive.
On speculative development and if you look at the next quarter.
We will start more spec spec projects somewhat less than we would have anticipated in January but pretty close to those those volumes. So we will be down slightly.
With respect to spec development during 2020 versus the January forecasts were actually up significantly with respect to the build to suit.
Volumes. So that's that's where it's coming from Mike you provided some color yeah, Blaine, let me add to that we saw some really strong.
Q3 in terms of build to suit, particularly in Europe was six project starts there across.
Diverse set of customers and our overall prospect list you heard US say this last time is probably a little bit shorter than it's been in the past, but the prospects on that list or is active and moving as quickly as we've seen in a long time in fact never see anything quite at the patient cores Amazon's a big part of that but certainly not all of it.
Then there's quite a bit of activity in the structural changes that were announced by the home improvements the food customers pre coded that they're now acting on at a quicker pace than even anticipated. So very confident in the diversity of our build to suit pipeline and the strength of it. So we're optimistic for the fourth quarter.
Our next question comes from Nick Yulico from Scotiabank. Please go ahead.
Hi, Good morning, this is somewhat for Nick.
Thank you guys for putting together some great research on on the.
On the retail conversion opportunity I guess I'm interested if you could share your insight.
Regarding why the freestanding retail component to choose an estimated 40 million square feet of conversions.
50, Bips to 150, Bips that your market share.
Yeah.
Why is it so little when the they're located in more densely traffic routes as well as our more supportive have more simply to bostco sizes just to give you.
Quantitative as mentioned the Bronx build over a two eco law, which is far less than the five to six acres that is typically required so.
So shouldn't this support more conversions across other areas and the Odyssey, putting food conversion decide what what drives your conviction that Dennis could actually displaying these up these boxes and or other nonperforming shopping centers for smaller delivery operations out any color any any insight to your attendance would be.
Great.
Hey, Sumit its Chris cadence. Thanks for the question first for those who aren't familiar what he's talking about provides US research published a paper on <unk>.
The largest dot com, we size the retail to logistics trend, we estimated at being five to 10 million square feet per year over the next decade.
This amounts to really a small part of our overall business less than 5%, Alaska touch less than 1% of the existing logistics real estate facilities for a lot of reasons. So sumant focused on.
The freestanding retail that is in fact, the largest category and so that is where we expect to see the most.
Conversion opportunities, but look the challenges are many and varied in terms of conversion trends, whether it's physical and your ability simply to use this site, whether its economic and rents versus the development costs on higher and better use opportunities, whether it's local politics or whether it's just the legal situation at the site.
Yes, the other thing I would add to that is that in freestanding retail by large isn't more western and southern.
Southern phenomenon because by definition those cities are less dense and actually that's kind of where you want to have free standing and last touch Dale you want to have it in dense metro areas and if somebody tenant retail boxing that metro area. They are likely to be doing pretty well with retail on that any.
Away. So it's it's sort of a catch 22 that that places where you can find these boxes.
Im not the places that there is heavy duty last batch tech demand.
The trick is getting.
The availability and the demand picture in the same spot.
Our next question comes from a Democrat who trust from Morgan Stanley. Please go ahead.
Thanks for taking the question just to build off the question on losing spread you alluded to the fact that you've sort of extended the trajectory into next year I'm. Just wondering if you can give us your updated thoughts on actual market rent growth in some of the key areas in the U.S., but but also maybe in some of the global markets. Just wondering if all the facts.
Sure as you laid out.
As potentially accelerated that trend as well into 21 in terms of actually the market rent growth.
[music].
Hey, Vikram. Thanks for the question so its Tom shared in his remarks global rent growth is on pace for 2%. This year on a larger share basis higher than that in the U.S. roughly flat in Europe and the us.
And better than that call it 1% in Japan Thats, a good number for Japan now what that looks like in 2021, we don't disclose numbers, but what I do think about or the headwinds and tailwinds for our business and to enroll.
To an earlier question. These lease trends suggest an improving trajectory for rent growth when I think about the positives for our business I think about low vacancy in a lot of markets around.
Around the world the structural drivers of Tom outlined in his script or really revealing themselves both E commerce and inventory levels, we've seen positive momentum in the third quarter and solid probably proprietary data and there is this potential decline in coated uncertainty co. Good economic weakness and you got to set that against the lack of clarity on coal.
Good.
Some of the challenges that are intended with the recession metal play on 2021.
Yes, but in terms of in some cases or rent growth on the earnings I mean, basically rent growth globally. This year is a little over 2% and probably 10% in the U.S.
Unless something really strange happens I expect that number to be pointed up now how much up in the last five or six years, we've always underestimated rental growth. So I don't know, but the primary driver of earnings growth is going to be my mark to market anyway, whether on the margin rents grow three.
Percent of 4% or 5% that incremental amount at least for the next year or two is not a big determinant on earnings so I'm not trying to duck. Your question I'm just.
Given that the kind of small changes we're talking about here I don't think the earnings implications are significant.
Our next question comes from Steve Sakwa from Evercore ISI. Please go ahead.
Thanks, just two quick questions here, Tom I guess, you pretty much raised all the metrics that in the press release with the exception of the same store NOI growth.
Yeah. Your bad debt expense is down again this quarter.
It is the headwind here just some short term issues on on occupancy number one and then I guess just as it relates to development to mean to the extent that the E. Commerce trend does continue and it looks like it's going to continue.
Continue to go up towards probably the mid Twentys, you know how long and sustainable do you think the development pipeline can you can stay over $2 billion given the.
It seems like the growing demand pipeline Youve got from from not just ecommerce.
But other categories that Tom mentioned.
It's Steve I'll take your first question, so what's happening with cash.
What's happening with cash same store, it's flat at the midpoint and it's all timing because we have significant significantly high leasing in both the second and third quarter and new leasing was significantly higher and as a result, what you're seeing is free rent from all of those lease commencements really hitting Q4, so thats it.
Little bit of a danger of using cash.
Same store here is because of that free rent is just kind of hitting in Q4, you'll note that GAAP same store went up 25 basis points commensurate with that debt. So it's really a timing issue from that.
From that initial drag on cash same.
Same store from free rent.
I think with respect to the lags.
E Commerce and their effect on development.
Going forward.
I would still say we're in the very early innings of that in the long term and.
And I think as long as we're in close it like growth rate in E. Commerce is going to be very very significant but as we come off of.
Close that I expect that to take it a little bit of a pause.
Bill will be at the very elevated level compared to where it was below that and that will start going off of that elevated level, but I think it will take deposits because I think a lot of people were just want to get out.
It gets somewhat back to normal, but when you move in FX had a reset in the demographics that really is involved with ecommerce.
There's a whole generation of people that before did everything analyze our now is to build anything.
Digital.
This exception of wanting to get out in the short term and do some things that they've missed doing.
But you know if we could go back and figure out what economists was before closing it and where it is likely to grow off of postcode that.
I would guess, there's an eight or nine maybe 10% change between those two levels pre and post code. It. So we've got more than five maybe seven years.
Ecommerce penetration.
That is that we will be sustainable as a result, the cold.
Our next question comes from Caitlin Burrows from Goldman Sachs. Please go ahead.
Hi, Good morning, there I'm, just maybe on that customer retention I think died on customer retention was 73% in the third quarter, which is the lowest and I think the end of 2018. So could you just talk about some of the drivers of that.
Tennants impacted by general economic uncertainty customers moving from our state a result of your own stance on pushing price there but.
The factors that retention metric where in the third quarter.
Let me take a stab at that one because that's a really interesting question I think you've heard many many times from different people that this economic recovery is sort of Acacia.
There was a world that has and the laws of more of them have not.
And relatively little into minimal compared to most other theory it well both of those things will on the two extremes.
The attention down the companies that are doing really well and expanding their business needs more space by definition. They can't stay in the same space and need to procure new space and the companies that are at the bottom of the K.
Going out of business or doing poorly so they're going to get back the space. So I think as long as we are diverging from the middle for some period of time, you will see declining.
The pension together with the fact that we're pushing rents more than we were in Q2 certainly Q2.
Now and Thats likely to guide retention downwards, but having said all that as large as our portfolio is of the billion square feet. Once you go through how much of that quarterly turns which is about 40 million feet.
One or two leases can move that percentage around between 70, and 80 pretty significantly so I don't get that exciting quarter to quarter.
I look at you know trail trailing four quarters.
As as an indicator and if you look at that our numbers have been forever, so anchored around 75%.
And we will hire a little lower but around that average.
Our next question comes from Eric Frankel from Green Street. Please go ahead.
Thank you just first can you comment on China portfolio occupancy, obviously, it's a small part of your portfolio, but it's obviously quite the occupancy rate quite different from the rest of your portfolio and then second I certainly agree with you that the.
Property values are higher than they were in the preclinical days, but maybe can you comment on the recent valuation between your larger global market to the regional market and whether you think there's a been a big valuation difference at this point. Thank you.
Okay, Let me take a stab at that.
Both questions and gene May have more comments certainly in the second.
China occupancy is concentrated in western China, most in Chengdu and challenging.
And as you know you know it's it shows the operating that fits in a big way, but in terms of our share is actually pretty de minimis kind of.
Kinda number having said that the way land allocations work in China is that a city opens up they allocate a bite your land and they put a requirement on view that you have to start construction in two years and that obviously does not allow development to be matched with demand to easily because you have this sort of course.
Yeah.
Development starts that they impose on you for giving you that scarce land sale that happened on a number of projects in western China that we kind of were forced to start all at once and that went right into when China's shut down and you know western China very auto centric. So the combination of all those things got a bunch of ways.
Let's see him in western China, it's about 70% of actually our total spec vacancy in the whole company.
But again the impact on rpms only spending relatively soon.
Small given our interest, but we need to get at least and we are going through a strategy of.
Actually.
Going for occupancy in being less sense to rent sensitive because the leases in China are very short.
In duration, and we're going to get that back that weve seen exactly the same movie.
In years passed in other regions in China. So.
We're pretty confident that.
It will not be an issue long.
Long term the wood.
We expect to valuation differences I can't think of a place in the world where valuation has not increased postcodes that number.
Now maybe there are individual market by market differences, but in terms of you as Canada and Mexico.
You know, Brazil, China, Japan.
Europe Europe is probably the number one declining cap rates among all the global locations. When I can get has a direct correlation to two things one interest rates are at historic lows and everybody's pretty much concluded that there is only be lower for longer and secondly, then.
Tony that was otherwise being allocated.
Two other sectors of real estate like retail and hospitality and office is actually not going there. So everybody has become a logistics.
So Shannon so a lot of that money Lucia seem to people show up.
That definitely never saw before so there are a lot more players looking to buy space and.
I think thats, a pretty good thing with you own 1 billion square feet of this stuff.
Our next question comes from Michael Carroll from RBC Capital markets. Please go ahead.
Yes. Thanks can you give us some color on the tenants into a sectors that are currently being negatively impacted by the pandemic has prolonged this already works through both of these issues are or should we continue to expect a higher turn lower retention over the next.
I don't know, how many quarters due to several quarters.
I think our retention is going to be between 70, and 80% like it has been forever and theres always churn through the portfolio and.
Than normal cast of characters, it's probably concentrated in retailers and big box retailers that are being disintermediated by.
E commerce, but there's some retailers that have done extremely well, obviously that the home improvement sector as Mike mentioned vendor and the grocers and the like are doing pretty well and.
A lot of the ones that are doing sort of well, but not super well are actually taking this opportunity to redo their networks and committing the new space because they now realize that E. Commerce is not a theoretical corrected them, but being better and get going on this because what they expected to see happen over five or 10 years. This happened.
The last six months.
I think I'm not saying that good question, but you look at the list.
You know the troubled retailers their pennies in the Sears as one of the world and all that and put it against our portfolio, we had one or two of them that frankly, they build on my radar screen I mean.
Okay. So de Minimis, but you know our teams are very focused on and on.
New leasing and they're frankly in many many cases those boxes are at least substantially below market. So we're happy to get them back and releasing its not an issue we need schools open.
Our next question comes from Brent <unk> from GBM. Please go ahead.
Hi, Thanks, you talked a lot about accelerating E commerce and inventory builds but could you speak in a bit more detail as to how those trends are developing in each of the global regions, where you operate.
I'm not sure what you mean by detail I think we were pretty early in adamant about this inventory rebuild we went out and quantify it at 5% to 10% and we gave you a projection on what that would mean in terms of incremental demand and the evidence thats come in since that time, it's pointing.
More to the high end of that range as opposed to the low in that range that is a general trend. So its expected more or less the effect are all markets.
Generally you can generally people are carrying more inventory the cockfield.
Carrying inventories much lower because of interest rates and the cost of missing on sales is very high so people are generally.
Any more inventory with respect to E. Commerce, I think we've been pretty specific about the percentages of sales that are going to go through the E Commerce channel and what the implications of that are on demand based on the three acts.
Actor so.
You know I think we can take those two facts and implied to historical demand pictures on every market.
And come up with a mass, but I don't think it would be productive for me to try to go through 80 markets here and giving predictions that are not going to be correct anyway.
Our next question comes from Jon Petersen from Jefferies. Please go ahead.
Great. Thanks, hoping you guys can maybe talk a little bit about expectations around the election specific maybe just high level. If you see if there's anything you're looking forward that could impact your portfolio, but more specifically, California is a big market for you guys and prop 15 would increase property taxes on commercial properties. So curious, how we should kind of be thinking about impacts of that.
If it does pass and then there's also been talk about Biden getting rid of 10 31 exchanges and just curious you have any thoughts on what that would do to evaluations and transaction volumes for where the warehouse space.
Yeah, It's gene I'll take the prop 15 and.
Probably kick the the other question Tom So.
So with respect to process. The move first of all we're going to see if it passes the polling looks right now like it probably won't pass.
Well, but if it does there are a few things to keep in mind, one it's going to take a couple of years.
For the individual county, assessors to respond mobilized and put.
Put it into action.
The other thing is relative to produce our average tax vintages is 2012 so.
So we're in relatively better shape than for example, local.
Local owners and of course this is pass through Red.
Revenue of the customers and our real concern is taking care of our customers and.
We hope this doesn't pass it's just it's just another tax in California the boots.
To these businesses.
But but bottom line is long term not a big impact to us.
Undeniably there will be some.
Effect on rent growth, but we're going to see if this this past this first.
In our intent everyone's time, just trying to get that yeah I'll take that.
Clearly temporary ones are very embedded in real estate transactions that are that code I think it's been around for almost 100 years, but I think histories and why we can clearly manage if that change does happen I don't know the profitability of that change, but if it does happen we can manage it extremely well. The first thing is from a sales perspective, we've always talked about that can be extremely patient.
You know were very under Levered.
Quite frankly under deployed a bit getting back to probably Jamie's initial question and so we can be very very patient on sale and then the second thing would be our dividend payout ratios in the low sixtys close to 60%.
This year and were generating about $1.1 billion of excess cash flow. So what would happen if the 10 31.
Change gets eliminated right our our taxable income could go up to the extent, we sold assets and the capital gain component of our dividend would increase and put upward pressure on our dividend, but again, we've got significantly low payout ratio and we were generating $1.1 billion free cash flow so while.
We utilize it we can certainly.
Manage around it.
I think the big agenda and the bigger issue at the end of two specific things you asked about is that California is becoming.
Increasingly difficult place to do business in and.
And it's not just these two things, but all that crazy propositions that are on.
On the balance this year and if you really want to.
Be entertained you can read the ones that applies to San Francisco.
Net or even funnier, but but.
California, better get its act together, because otherwise they are going to kill the Golden Goose and.
That is a concern for everybody having said that it is the world's largest fifth largest economy and.
Continuous.
To be dead set of innovation and a lot of other things around the world. So we met muddle through on you know, but but but sure the politicians that makes it very difficult for us.
For this economy to remain competitive so.
That's much more concerning than past 13, or 10, 30 loans, specifically at least to me.
Our next question comes from Jason Rodgers from Baird. Please go ahead.
Yeah. Good morning, Thomas as we follow up on maybe those earlier comments you made about the case shape recovery in that lower leg of the K that everyone's trying to figure out.
Is there a way you could give us straight line rent write offs that you've seen in the third quarter and year to date to kind of provide some color on that and then maybe just a follow up on the deferrals. I think you said, 95% have been paid to date can you kind of give us a run down just on the I guess the level of direction of the deferrals. It seemed like maybe they were up a little bit in the third quarter versus second but.
It may just be the way it's been quoted so any color there would be helpful. As well. Thank you.
Thanks, So on your first one just regarding straight line rents you know those are those are.
Those are netted out against termination fees. So when you see or termination fees those are net of those.
I mean listen if its termination fees are probably have averaged 3 million bucks a quarter. If you looked over a long period of time I would bet.
I don't have the precise number but it was about the straight line rent components a million dollars netted against that.
So it's it's we have calculated we've certainly taken into consideration.
And our bad debt calculation as well.
Regarding deferrals been very happy with the deferral collection. So we've built deferrals.
To date are about $40 million of deferrals of 61 basis points of annual growth, France, we've build to $20 million that are half of its do we collected 95% of that already.
The most about 5% to collect is really in October.
But its trending very normally with prior prior months sort of expect the vast majority of all that to come in.
Well the world of the $40 million of deferrals will build a total of 80% of that this year. So.
So the knocked out of the way we've got about half of it collected already and we'll get another 30%. Both ends at the end of year. So I think there should be wrapped up but time, we get to the end of year, we'll have some that will roll into 21, but.
It will get taken care of and good order. So I feel very good about collections and very good about the barrels.
Our next question comes from Mike Mueller from JP Morgan. Please go ahead.
Hi, if you look at upcoming development starts into 2021 are there any significant size through to ground spices to pipeline.
Hey, Mike this is.
Go ahead Jim.
Sorry, Chris.
Let me start Chris you, probably as much as it sounds like there.
There really isn't Mike and in fact, I think thats.
Unique about the situation that we're in.
Other than space is under 100000 square feet, which we generally don't develop.
Much in that that sector anyway.
Oh Man has has been and is becoming even more broad based.
So I really don't think Theres any particular markets.
Or product types and call out obviously that would be very very significant strength in the big box sector, we're going to meet that demand, but I don't think the composition of the deals looks much different than for example, they did last year.
Chris.
I would say in Europe, France, and Poland are going to be low on that list.
In terms of places where I expect.
Less than trend line development and.
And I think Japan is going to be busier.
Given the strength of those blankets.
Our next question comes from Tom Catherwood from BTG. Please go ahead.
Thank you.
Tom going back to your opening comments, you talked about rent growth and occupancy lagging and spaces under 100000 square feet and then Jean you just mentioned that has been kind of broader based demand center for certain tenants.
But is the lagging occupancy and rent growth.
We have to deal with the key shape recovery because these tend to be smaller tenants and the smaller spaces or is it that companies are finding they could accomplish ecommerce fulfillment out of larger facilities that are close to but not directly in population centers.
It's the former and thankfully that smaller spaces.
Kinds of tenants in them they have big tenants in smaller spaces for there.
Okay are there more closer in distribution and those are just doing fine then lender.
Smaller spaces believes to smaller businesses that are more vulnerable to goods economic downturn and therefore, there's more churn in there.
I expect that to and sort of the market getting better is because that's a lot of that training took place through the early days in every day that goes by the survivors are surviving and holding on so I expect that to.
Two big decline the problems in this small spaces or the small tenants to decline and at some point that will flip because in the aftermath of economic downturns in.
In the past business formations have have really skyrocketed and I expect a lot of people that are being laid off or losing their businesses, we'll get back some songs often stagnant business. So.
That will come back, but it may be a lag, but big businesses in small spaces that we just find that apartment.
Our next question comes from Craig Mailman from Keybanc capital markets. Please go ahead.
Everyone, maybe just going back to E commerce and as it relates to to maybe the U.S. specifically that you guys throughout.
What Amazon was and what Threepl elsewhere, I'm, just kind of curious as you run the data and see what you think expected demand incrementally would be from kind of that pull forward of E commerce demand versus what you've already kind of putting on the books or what the pipeline looks like do you have a sense of may.
Maybe just describe it as a way of kind of when that wave crest from a quarter perspective, and we kind of hit the peak of that demand and they kind of trails off and how that is.
Is impacting.
Potential development starts as you look out not just for you guys, but for the market clearly you guys.
Clearly you guys are truly expect that going on Im just kind of curious if others are terms expect on in anticipation of this is it.
How that could potentially into.
Impact that rent growth is the expectation in the second half 21 development deliveries would turn to really moderate if that maybe just not happen given.
[noise] kind of these other dynamics going on.
I think we are in the early stages of certainly.
Certainly.
Earlier than mid stages of E commerce growth.
And I think what's happened in the last several months is that we've got to do five to seven years of growth. So.
So I don't think we're going to give any of that back I think we are going to plateau for a while as people go back to.
Regular shopping in restaurants, so not eating at home and all those things and then it will pick right back up at a more elevated levels. So I didnt way, we ought to keep your eye on is that is the tsunami of ecommerce coming through.
What happens to the ripples on top of that Big wave frankly in which quarter I have no idea honestly and it varies market by market, but we don't run our business based on localism topic on top of the big way in terms of are there dynamics in the marketplace that.
Could make it.
Make it difficult for the demands of that wave to be fulfilled. The answer is yes. The most desirable markets are the ones with the tightest land.
The most difficulty in finding large pieces of flat land that became build these buildings that E commerce players demand et cetera et cetera. So with every passing day we're.
We're having more demand from that sector now its elevated and is stabilizing at a much higher level off of which it's going to continue to grow and it's showing up a lot of inland.
R&D was in short supply and the more desirable market. So I think thats the thats the positive effect.
Our next question comes from Emmanuel Korchman from Citi. Please.
Please go ahead.
Hey, good morning, if they're it's Michael Bilerman here with Manny.
And we don't want to come to sort of your view on the asset management business. Tom had made a comment in the opening remarks.
About your business life perpetual.
In comparing it relative to that looks good asset managers.
In terms of how they are being valued versus how the business within corelogics is being valued and do you think you've shown tremendous amount of creativity in terms of structuring your enterprise leveraging a lot of different structures, whether they are externally managed hosting entities using from.
Incentivizing management with.
With part of the compensation structure in that business. So I guess, how are you thinking about taking it one step further and somehow making this entity either public or a private entity to.
Highlight that value or do you view this just as within pro largest.
And we just hope the market would give you the appropriate value.
Excellent question and let me just to pile on your question say there are two businesses. One is the development business and one of the investment management business that I.
That I guarantee you.
Right to the numbers of our development business and it wasn't quite a PLD is just the freestanding business and by the way we have those numbers going back to your 2000 okay.
Okay and showed it to your homebuilding analyst at Citi.
I bet you do we will value us at two and a half times book devoted to.
Development business and a multiple that's more in that team and.
And if I did the same thing with the investment management business actually showed them the the the.
The numbers that trends in those numbers the permanent capital nature of most of those funds well over 90% and stickiness of those and the promote history of those funds.
I'm willing to bet you that they put a 25 multiple on that prepare most number and will give us the present value of the promotes on top of that the net of it is I think both of those businesses are value that about 30% to 40% of what they should be now that he is to really get under my skin and.
We spend a lot of time trying to figure out whether we can do a saucer section separation and all that kind of stuff. The governance issues that come along with that are very difficult and complicated and pay inflow of where do you develop how do you change rebound.
So and frankly, it doesn't matter anymore. It's a 140 billion dollar enterprise and whether its couple of billion dollars here and there in terms of incremental value eventually people and get it done we'll give us credit for it. So I guess to answer your question in a very straightforward way, it's the latter.
Statements that we make payment given up the complexities on Mount birth.
You know the incremental value that we may get in the short term I'm sure we'll get to be long term because the evidence is becoming is it sort of becoming so indisputable.
But it's kind of nice really amusing at this point and annoying.
Our next question comes from Jamie Feldman from Bank of America. Please go ahead.
Great. Thank you.
You were talking about upping your outlook for and its actually 210 million square feet 10 completions 290 million square feet.
Can you just talk more about what you're seeing from maybe non re competitors in terms of their appetite to ramp up speculative development and then also we had to delay in construction, but what does this all look like heading into 21 and even early read on what your supply demand forecast look like there.
The answer to the second question is yes, we have an idea what it will be but we will share with you at the next call when we provide guidance for 2010.
21.
With respect to non re players you know they continue to be by far the biggest.
In aggregate sector of develop them have always been we'll continue to bit would be the fleets.
As large as they may be are higher I don't know, 20% of the business maybe in the modern relevant market. So really the private market is the vast majority of these activities.
And I would say.
And there is some undisciplined development in the private area, but I would say.
Other than Poland, I can't really think of a Crazy example would that maybe Houston Poland in Houston.
But by a factor of five it's bowling and maybe.
Somewhat resistant.
And the regulatory there's not that these private developers all public developers have forgotten how to build buildings or any less interesting visibility is just really tough to find them land be entitlements to.
To build the buildings of this size that the market demands to lead the latter this burgeoning.
Demand from the day pharmacies or so so I think just tough and.
So so development levels are going to be it is because of the difficulties of navigating that I mean, the present time periods for large pieces of land in the desirable markets move the northeast and the West coast and all that.
Literally three to four years on on the large pieces of land and you got to jump through all kinds of boots and complexity. So it becomes difficult to tie up a piece of land to take.
To take the Kid is Adam.
Adam we processed and you got to buy lied here by a lot better and.
It's just difficult so.
Thats, what I would say about it.
Our next question comes from Caitlin Burrows from Goldman Sachs. Please go ahead.
I mean, I think before you mentioned that there is a lot more people showing up that that really hit that transaction market an acquisition, but our current for like 2020 guidance on a big increase I think that kind of getting to $50 million mid point 609 average than I am.
Last quarter. It could you talk about the current 10 vaccine market and how those two pieces behind that but it seems pretty logical my comment on your ability and my commentary.
Tires.
No there are a lot more players and our acquisitions are not sort of the no brainer acquisitions that are raised to who accepts the lowest Iowa.
Just to say that they are in the industrial business, we're not in that business. I mean, you know when we show up at every one of those options because we want to keep people on has been going on what's going on but honest to goodness, we're not buying a whole lot of clean protect being a brochure cover qualities I mean, if I told you about the market on some of those things that we've seen recently.
It just beyond really cool.
I think most of our volume comes from more infill more repositioning place last patch plays urban place sort of stuff that that ratio of the cost them money too.
The level of effort and talent skewed towards the level of effort and talent and customer relationships. So we know where our strengths are if it's a race to the two who access the lowest firearms that's not the business. We're in we leave it to two people really like that business and there seems to be more and more of them every day. So.
No.
But we have great visibility and as you know you you may remember that people always ask me about acquisition guidance and I say.
Zero to 10 billion and we've actually exceeded the down the top end in the past and then zero at other times, we don't have a budget for acquisitions, because it all depends on pricing and availability of quality property you can make your acquisition guidance Q1 at the end, we here, but it would not be a prudent thing to do but one.
We get this closely end of the year you have visibility on on really what's happening not only this year, but through them.
Middle to third quarter next year, and that's what gives us the condiments that increase those numbers, but they're mostly.
Hi, and for value added types of things.
Not that passive.
No brainer again.
Caitlin I think that was the last comment so I want to thank everyone for attending our call and we look forward to being with you in the new year and sharing our 2021 guidance. Thank you.
Ladies and gentlemen, this does conclude today's conference call.
Thank you again for participating you may now disconnect.
[noise].