Q3 2020 First Industrial Realty Trust Inc Earnings Call
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I like to hand, the conference over to your Speaker today Art Harmon, Vice President Investor Relations and marketing. Thank you. Please go ahead.
Thanks, a lot Chris Hello, everybody and welcome to our call before we discuss our third quarter 2020 results and updated guidance, let me remind everyone that our call may include forward looking statements as defined by Federal Securities laws. These statements are based on managements expectations plans and estimates of our prospects.
These statements may be time sensitive and accurate only as of today's date Thursday October 22nd 2020.
We assume no obligation to update or statements or the other information we provide.
Actual results may differ materially from our forward looking statements and factors, which could cause. This are described in our 10-K and other SEC filings.
Can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release supplemental report earnings release entering the SEC filings are available at first industrial dotcom under the investors tab.
Our call will begin with remarks by Peter Brazil, Lee, our President and Chief Executive Officer, and Scott Musil, Our Chief Financial Officer, After which we'll open it up for your questions.
The call today are Jojo, Yap or Chief investment Officer, Peter Schultz Executive Vice President, Chris Snyder Senior Vice President of operations and Bob Walter Senior Vice President of capital markets and asset management now, let me turn the call over to Peter.
Thanks Art and thank you all for joining us today.
We hope each of you and your loved ones are doing well staying healthy and productive.
I would like to once again, thank the entire fr team for all of their efforts over the past seven months, well navigating the pandemic to maximise collections and achieve our leasing investment operating and capital markets objectives.
In the third quarter and fourth quarter to date, the industrial market has experienced an increased level of leasing activity with E commerce, leading the way and other broad based industries represented among new lease signings.
And its preliminary third quarter report CBR, He reported 56 million square feet of net absorption versus 68 million square feet of completions.
I'll discuss what this pick up in business activity means for our upcoming speculative development efforts in a moment.
But first let me briefly touch on cash rental collections.
Our results continue to be very strong, reflecting the quality of our tenant base and portfolio as well as the great work of our team.
For the second and third quarter, we've collected 99% of monthly rental buildings and all nine of our remaining rent deferral agreements are current.
Scott will walk you through collections and our third quarter bad debt expense in more detail later.
I would like to highlight several key leasing solutions executed by our team in southern California.
We successfully replaced the largest tenant on our watch list at a 225000 square foot building in the inland Empire.
By executing a new lease at current market rents, we captured a 27% rental rate increase.
And other major leasing wins, the southern California region executed on a comprehensive plan to replace three tenants in the South Bay market of L.A.
These transactions allowed us to significantly enhance the credit profile of those tendencies and meaningfully increase rental rates at those properties.
With a moratorium on evictions in California. These solutions generated substantial value in a fraction of the time it would have taken to go through the courts.
We were able to accommodate leading ecommerce tenants need for our 214000 square foot building, which will serve as a state of the art last mile delivery facility and which also resulted in a 9% rental rate increase.
We successfully moved the prior tenant to a smaller 23000 square foot building, that's better suited their current needs for a 58% rental rate increase.
Lastly, we also replaced the tenant at our 63000 square foot Transload facility at a 92% increase.
Based on these successes cash rental rate growth for leases commenced in the quarter was 20.3%.
For the full year 2020, we expect the increase in cash rental rates on new and renewal leasing to approximate 14%.
Which would be at the top end of the original range, we set forth on our pre Cove It fourth quarter 2019 earnings call.
To give you a look into cash rental rate growth for 2021 as of today, we have signed approximately 32% of our 2021 rollovers at a cash rental rate increase of 12%.
Now I'd like to share with you. Some recent development leasing progress since our last earnings call.
We signed a tenant for 100% of our 103000 square foot first Sawgrass Commerce Center in South, Florida on a long term basis, which is set to commence upon completion in the fourth quarter.
In Dallas, we signed a full building lease for the 199000 square foot first fossil Creek Commerce Center the commences November 1st.
We also leased 37000 square feet at one of our first park 121 buildings, which is slated to commence January 1st that.
That 125000 square foot building is now 80% leased.
The investment market continued to rebound during the quarter and the industrial sector continues to be favored by institutions local investors and users given the solid fundamentals and the secular driver of E Commerce.
The sector remains highly competitive and we continue to use our platform to uncover select opportunities in target markets.
Acquisitions totaled $20.2 million in the quarter and included three well located land sites.
In Seattle, we acquired a 6.6 acres site developable to 129000 square feet.
We added a 26 acre site in central Florida that can accommodate up to four buildings totaling 329000 square feet.
Lastly, we acquired 3.1 acres in the inland Empire West adjacent to our first Elm site, which will enable us to build 84000 square feet on the new larger combined site.
Turning now to our development program.
We're excited to launch our first speculative development projects since the beginning of the COVID-19 pandemic.
We plan to start the first phase of our first park Miami development in the fourth quarter.
Recall that we acquired this 60 acre site in the first quarter in the infill medley Submarket near the airport, but put the start on hold due to the pandemic.
We can build a total of 1.2 million square feet and the first phase will be three buildings totaling 600000 square feet.
Total estimated investment for this phase is approximately $90 million and our targeted cash yield is in the mid fives.
We also plan on starting the 141000 square foot first 95 distribution center, a little further north in Pompano Beach.
Total investment is approximately 21.7 million with a targeted cash yield of 6%.
To support our ramp up of our developments at first Park, Miami, and first 95 and potentially other sites in target markets, which we continue to monitor we tapped our ATM program during the quarter issuing approximately 1.84 million shares at an average price of $43 and 16.
Sense generating net proceeds of $78.7 million.
Adjusted for our fourth quarter starts our on balance sheet landholdings can accommodate approximately 13 million square feet of future development with the vast majority of site entitled and ready to go.
Summing up our development pipeline at September Thirtyth, we had a total of $245 million of developments under construction or in lease up comprised of 2.6 million square feet, which is 39% leased as of today.
With a projected cash yield of 6.6% our estimated average margin on this batch of developments is approximately 47% when compared to prevailing market cap rates for similar leased assets.
Updating you on our joint venture activity, we successfully leased the 644000 square foot spec building at PV three years three to a single tenant.
The building remains on track to be completed early next year.
Our portion of the investment is 20 million and our cash yield is 7.1%.
We also sold two land sites at PV, three or three in the fourth quarter totaling 93 acres to two separate users with our share of the sales price totaling 11 million.
Today. The venture has 139 of the initial 532 developable acres remaining and has returned 137%.
He originally invested capital.
In the third quarter, we formed a new JV that acquired a 568 nine acre site about one mile North of PV 303.
We're pleased to partner once again with Diamond Realty, the U.S. real estate arm of Mitsubishi Corporation.
Together, we purchased the site for 70.5 million, an all cash transaction with our interest at 43%.
Like the Pvthree O three venture the new venture will engage in speculative development as well as build to suits and one off land sales to users.
First industrial will earn development asset management property management disposition and leasing fees and we have the opportunity to earn a promote beyond and established return.
Our rationale for this investment is the same as our Pvthree EPS three venture.
The new JV provides us the opportunity to capitalize on a large investment.
Without incurring outsized risks.
End market concentration in Phoenix.
Moving onto dispositions during the quarter, we sold two properties for $15.2 million and we completed the sale of the $55 million Phoenix asset for which the tenant exercised its purchase option last year.
Thus far in the quarter, we sold two buildings comprised of 194000 square feet for five point Sixmillion Ics.
Excluding the purchase option related sale, we sold 759000 square feet for a total of 61.8 million year to date on our way to meeting our sales target range of 125 to 175 million.
In summary, we had an excellent quarter with great execution by our team. We are very excited about restarting our speculative development program and taking advantage of the great growth opportunities in our target markets with that.
With that let me turn it over to Scott.
Thanks Peter.
Let me start with the overall results for the third quarter.
Diluted EPS was 28 cents versus 62 cents, one year ago and they.
And they reached funds from operations were 49 cents per fully diluted share compared to 44 cents per share in Threeq Q2 thousand 19.
Excluding approximately four cents per share of income related to the final settlement of an insurance claim.
Three to 2020 at that FFO was 45 cents.
Third quarter 2020 fold includes approximately $400000 of cash bad debt expense related to tenant accounts receivable.
As Peter discussed we were able to replace the largest tenant on our watch list in southern California.
As a result, the replace tenants will not impact our bad debt expense going forward.
The other tenant on our watch list, we discussed on the second quarter call has paid through September.
Note that we added another tended to our watch list, which occupies a 137000 square foot building in Chino in the inland Empire West.
Let me walk you through some additional details on collections.
Our regional teams continue to do a fantastic job.
As of yesterday, we had collected 99% of monthly rental buildings every month from April through September.
So far this month, we have is collected 99% of October billings, assuming collections from government related tenants that pay at the end of the month.
On rent deferrals. The total outstanding balance is only $250000 all of which is expected to be paid off by year end.
And all tenants with the full agreements are currently in compliance.
Please note in our calculation of the collection percentage metric the numerator only reflects cash collections and we do not give ourselves credit under our method methodology for the application of security deposits unless it is for a terminated tenant.
Occupancy was strong at 96.3% down 140 basis points from both the prior quarter in from a year ago.
As expected pure one vacated our 644000 square foot building in Baltimore at September Onest, which impacted occupancy by 1.1 percentage points, we are and.
We are underway with some make ready work at the asset in our marketing the building for lease.
We consider the lease up of this facility is similar to a speculative development. So we are assuming 12 months of downtime.
As always we will strive to beat that.
As for leasing volume during the quarter, we commenced approximately 2 million square feet of leases.
800000 were new and.
And 1.2 million were renewals.
And tenant retention by square footage was 68.4%.
Same store NOI growth on a cash basis, excluding termination fees was 1.3%.
Hello, slight increase in rental rates on new and renewal leasing and rental rate bumps embedded in our leases.
This was partially offset by lower average occupancy and increasing.
An increase in free rent and slightly higher bad debt expense.
Cash rental rates were up 20.3% overall with renewals, increasing 14.9% and new leasing up 29.7%.
On a straight line basis overall rental rates were up 33.9% with renewals, increasing 28.1% and new leasing up 43.8%.
Moving now to the capital side.
As announced on our previous earnings call in July we closed on an extension of our term loan that was scheduled to mature in January of 2021 that effectively has a three year term.
At September 17th we closed on our $300 million private placement of 10, and 12 year notes with a weighted average interest rate of 2.81%.
At September Thirtyth, our net debt plus preferred stock to adjusted EBITDA is five times. Please.
Please note that we have excluded the one time insurance claim settlement amount from EBITDA and we normalize GE at eight.
The weighted average maturity of our unsecured notes term loans and secured financings with 6.6 years with a weighted average interest rate of 3.7%. These figures exclude our credit facility.
Moving on to our updated 2020 guidance per our earnings release last evening.
Our guidance range for Navy asset, though is now $1.82 cents to $1.86 cents per share with a midpoint of $1.84 cents.
This is four cents per share higher than the midpoint of our guidance to discuss our second quarter call.
Due to income related to the final settlement of an insurance claim previously discussed.
Our guidance range for FFO before this item is $1.78 cents to $1.82 cents per share with the midpoint unchanged.
Key assumptions for guidance are as follows.
In service occupancy at year end fourth quarter of 94.5% to 95.5%, which implies a full year quarter end occupancy range of 96.4% to 96.7% with the midpoint of 96.5.
Percent unchanged.
Our cash bad debt expenses assumption remains $900000 for the fourth quarter and please note that guidance does not include any potential write offs of deferred rent receivables related to tenants that are having financial difficulties.
Fourth quarter same store NOI growth on a cash basis before termination fees of negative <unk>, 0.75% to positive 0.75% with the midpoint being flat.
In addition to the NOI impact from pure one vacating fourth quarter same store NOI also reflects the impact of free rent from the leasing solutions in the South Bay market, we discussed earlier.
Incorporating this fourth quarter guidance, our full year 2020 quarterly average cash same store NOI growth guidance is 3.8% to 4.2% an increase of 25 basis points at the midpoint, reflecting third quarter results any tightening.
The range compared to our prior guidance.
Our guidance remains unchanged at $31 million to $32 million and.
And guidance also includes.
The anticipated 2020 costs related to our completed in under construction developments at September Thirtyth.
Plus the expected fourth quarter starts a first park Miami and first 95 distribution center in.
In total for the full year 2020, we expect to capitalize about five cents per share of interest related to our developments.
Our guidance does not reflect the impact of any other future sales acquisitions or new development starts. After this call other than the expected fourth quarter first Park Miami in first 95 development starts.
The impact of any future debt issuances debt repurchases or repayments. After this call and guidance also excludes the potential issuance of equity, let me turn it back over to Peter.
Thanks, Scott before we open it up to questions. Once again, let me. Thank our team for their great performance and commitment to our customers each other and our business objectives. We are.
We are excited about restarting our speculative development programs to drive future growth we all.
We also look forward to the further recovery of our economy and continued progress in the fight against Cove at 19, and the careful restoration of so many important aspect of our daily lives.
Lastly, I would like to remind everyone about our upcoming virtual Investor day on November 12.
There, we will lay out in much greater detail the state of the industrial sector, the strength of our platform and current portfolio and our vision for growth.
We hope you plan to tune in please.
Please reach out to art Harmon, if you would like to RSVP or with any questions.
With that we will now move to the question and answer portion of our call. We ask that you. Please limit your questions to one plus a follow up and then you are welcome to get back in the queue.
Operator, please open it up for questions.
Thank you and just as a reminder, if you'd like to ask a question. Please press Star then one on your telephone and to withdraw your question press the pound or perhaps.
The first question is from Craig Mailman with Keybanc capital markets Your line.
Hey, good morning, everyone.
Peter I appreciate your commentary on kind of swap and some of those tenants out there on the watch list. So I'm just curious.
Kind of an update on maybe what the watchlist looks like today and how much you guys have looked at you know.
The percentage of your tenants that really relied on the PPP program and what this delayed kind of the second stimulus.
It is ultimately doing to kind of their credit worthiness is as we continue to go without a deal.
I'll start out and then Scott will pick up for the rest as far as how many are him or her.
How much of our rent took advantage of the PPP, we really don't know.
We do know a number of tenants did take advantage of it.
We don't know what they spent the money on we don't know if they spend on personnel or rent.
But it wasn't a big number and Scott you want to talk about watch list in the go forward, Yes, you're correct. There's two tenants on the watch list want to carry over and we talked about in our second quarter call wanted new one.
Their quarterly rent is about $450000 one of the tenants also owes us about $400000 prior two to four quarters. So if every.
Everything goes bad with those two tenants your total bad debt expense would be about 850000 compared to our guidance of about 900000, but I would say that the good thing about these two tenants is if we're able to get to the spaces early both tenants rents are below market.
So if we're able to work some magic.
Magic there.
And work our way to get those tenants out hopefully, we can push rents up a little bit higher.
On your question on PPP.
Payments have been very strong it's 99% for every month since March I would say the payments activity was a little bit stronger in the last couple of months.
My feeling is that if there is not a new stimulus package passed I still think our tenants will do pretty well, we'll do pretty well from a collections point of view.
I hope that helps health no that is helpful. And then just switching to development you guys are kind of turn it on spec one of your peers is turning out of spec a little bit could you just.
Talk about the.
The risk appetite and kind of the.
Maybe the conversation you guys have an investment it can make today versus.
Pre pandemic about that decision to start an incremental project, particularly with some availability still left in the under construction and then kind of lease up segments or your pipeline.
What we have just gone through and so shutting down the development pipeline made a lot of sense. It was certainly prudent.
Now we've had the benefit of the past six or seven months to you how we handle this as a nation how we.
How we manage it how it impacts health and how it impacts the economy and so there's a lot more information. There. In addition, the business activity has picked up some picked up significantly it began really in June and I would say back in June it was a lot of conversation in the last two or three months, it's been much more in the.
People, making decisions and signing leases and so that's all that's all good so from a risk standpoint, we think that.
Focusing on the higher barrier markets, the coastal markets, where consumption is still going to be the highest business activity will be the highest is the best place for us to begin new just new speculative developments.
What was the second part of your question.
No just in terms of did any of your underwriting criteria change or get more stringent to start new projects or just kind of curious your conversations within committee around starting the new projects.
No I think look when we when we first went into the first part Miami opportunity the math associated with that hasn't changed. So the initial underwriting. We did has been confirmed by the economics in the general outlook for the economy that we have today.
So yes, I mean, if we saw a deterioration in those economics relative to the risk, we'd obviously make a different decision.
Great. Thank you.
Our next question comes from Michael Carroll with RBC capital markets.
And so.
Yes. Thanks, Scott can you talk a little bit about the 137000 square foot tenant in Chino why were they added to the watch list. This quarter was there a specific catalysts that occurred over the past few months.
This is a tenant we have been working with on payment there theyre very actively using the space. We've had a lot of dialogue with the tenant and we weren't able to make an agreement with them on payment.
So this has been going on.
Quarter or so so we decided to add them to the watch list like that that's basically the story behind that new tenant I'd I'd remind you on this that California has a moratorium on evictions and this particular tenant seems to want to take advantage of that.
Okay, and then immature is there an ability I know that you kind of mentioned this earlier about replacing it sounded like you did in South Bay with the new tenant and moving them to a different place. It sounds like this tenant in Chino does not want to do that what about the the second tenant thats on Euro on your watch list are they open to that type of move.
Hi, This is Joe Joe definitely Thats part of a potential solution, we are not ready to announce yet let solution. We come to weather does a solution or at the end of the day, we collect the full rent or we accept any kind of plan. So that's in the works.
We're very pleased we were able to execute that in a multiple number of bill.
Buildings.
Ill, let Scott initiatives hundred 37000 is in our new developments first ranchers is one of the tightest submarkets in L.A. The other 45000 foot or is in the heart of South Bay, and that's it and new development too and debt in place rents, maybe about 40% below market. So like Scott said Swann.
As reported that we'd be happy to take back the space, but conversations are ongoing you know a lot of the a lot of owners at prices their business and they want to keep their business. So you know, we're just trying to get a little bit approach just like the other three days as we mentioned in our prepared remarks.
Great. Thanks. So our next question is from Keith.
Then Kim with Trust your line is open.
Thanks, Good morning, guys.
So you guys mentioned that you signed about a third of that 2021 lease rollover and a 12% cash we spread.
Any particular earlier like details behind the remaining two thirds and what's rolling.
In terms of like.
Should we is there any reason to expect at least start to be materially different and 12% going forward.
Hi, Kevin This is Chris I mean, obviously, we're pleased with what we signed so far on the 12%.
Right now we're going through our budgeting process, we'll give you more oh look on that when we do the earnings release in February, but we're very pleased with the 12% so far.
Okay.
Okay and any update on a couple of pockets of vacancy that you have remaining in the development pipeline for assets like Redwood or independence.
Any kind of color you could provide on just the activity you're seeing from prospective tenants.
Peter Schultz you want to talk about independence, and then Jojo can talk about the rest short good morning, Kevin on independence.
That's a 100000 square foot building that we finished.
In Philadelphia, the end of the second quarter, which as you might recall was delayed a couple of months because of the construction shutdown.
So were one of very few choices for tenants we.
We have had some activity on the building.
But nothing to really comment on today, but we continue to be encouraged by that opportunity to outperform Joe Joe.
Yes, Peter Keith Hello.
In terms of our developments will be completed overall as you know were 24% leased.
Basically we discussed in our Houston.
Skews in our Houston development project Houston somewhat slow.
There is supply this came in that exceeded net absorption, but we love our project in Grand Parkway, Great access to the freeway and that is one of the best product with freeway frontage, what we've noticed in that market is that basically.
Second quarter activity kind of shut down, but now the activity starting to pick up and they'll be responding to a more RFP.
In terms of the projects really not Empire West which is.
First Redwood logistics one into in that two situations that those political theater ready, we're getting a lot of activity and we're responding to us. It's a significant amount of proposals and a lot of inquiries. So we're very bullish on that so we're very happy where that's been.
And in terms of.
The buildings in Dallas.
Northwest Dallas, we're very happy that as you know, we we have a we built a big building. There just completed this now 77% leased at 433000 square feet now we have to a smaller base.
Smaller buildings, there, which right now is about.
20% slightly over 20% lease so that has seen good activity as well.
Okay. Thank you.
Again, Please press star one if youd like to ask a question. Your next question is from Rob Stevenson Jan rooms open.
Hi, good morning, guys.
The start of Miami in first 95, and then you guys completing Sawgrass and park 121.
Well the pipeline looks like it's going to be 85% South Florida few months. This just a timing quirk is this concentration on purpose to south Florida that strong right now to have $1.2 million of spec space under construction help us understand that one.
Sure sure, whereas we basically saw grass.
You know as a 100% leased and we're very pleased about that because we're not even done that building. So in terms of the starting of new projects their catering to a different submarkets one the FP 95 as further north there's very very little vacancy and that's.
And that's very very accessible is that a free for you a very small base is so low vacancies that submarket and.
And the FP.
Miami that is right in the heart just north of Doral, and that's a very very tight market, we're very bullish and very excited about that project because our our project there would probably be one of the most highest quality locations that you can find out there first bank Miami So.
Ill bullish about that project side of a lot of activity of course, our job to is that is to execute on the building completion and lease it up but we're already getting inquiries. Despite.
Despite the fact that we just started on a first frankly I mean.
Okay, and then you guys talked about France being up on the new leasing both in the quarter and the stuff for 2021, what about cost to get them signed any notable changes to leasing costs today versus previous quarters previous years.
Yeah. This is Chris you know as far as the leasing costs obviously.
New deals are typically four or five times more than a renewal deal, but as far as what were seeing right.
Seen any real changes as far as the costs. Obviously, if you have longer terms your mind.
Total dollars would go up.
But you know were not seen any significant changes from that standpoint.
Okay. Thanks, guys.
Your next question is from Sumit Sharma with Scotiabank. Your line is open.
Hi, guys. Thank you for giving me an opportunity to ask a question I'm just wondering with regards to some of the recent large leases 99 to PV 303 first fossil creek, what's what's the cream that free rent period look like.
In terms of accretion into the cash NOI stream.
Basically market and market today is basically less than a quarter to half a month of free rent per year of lease and the deal that's across the market as Evan said, So again, let me repeat it's a range from a corridor.
Up to half a month ended depends across the country.
Gary Prairie lease here.
Got it. Thank you so much I'm also wondering about the GAAP EPS that has been brought up I want to be a good shadow supply conversions from retail a lot of.
A lot of focus is on complete conversions of existing retail into into warehouses, which have their own sort of issues, but just wondering whether youre here. What you guys are hearing from your clients Netflix line of sight to you guys.
Where the tenants are actually looking to run smaller fulfillment operations from existing retail footprint and if that is the case and you know whatever the bogey you put on that just wondering how you guys are thinking about it with with regard to your portfolio in terms of Shadows.
In terms of shadow supply risk so.
So conversions have been a topic for quite some time now we have been saying really all along that that's really not going to be a significant part of the overall supply.
Supply base that said.
About 17 billion square feet approximately of industrial square feet around the country.
Looking at a much much smaller amount of conversion space, that's going to make sense from an economic standpoint.
We also don't have a lot of retailers in our our tenant roster. So we wouldn't be having discussions necessarily about the conversion of retail and what they might do there. So it's going to happen here and there.
You've got lots of different barriers economics are a major barrier the rents for industrial are much lower than the rents for retail or mixed use and you've got also the the permitting and approval process, where the neighborhoods don't want.
53 foot trucks, or even big vans going through the neighborhood. So it'll happen here and there, but we don't see it as being a big component of the overall competitive set.
Okay.
Thank you very much.
The next question is from Eric Frankel with Green Street. Your line is open.
Okay.
Can you just help provide the bridge to what you are somewhat lower same store NOI growth results from from the last quarter. So it makes sense, but the occupancy drop a pure won that seems.
Thats same store results would be a little bit lower but maybe you can provide just a break out of what the cash or what free rent and bad debt.
Same store thank you.
Hey, Eric is this this is Scott I'll I'll.
Compared to the first half of the year to the to the back half for the year, because I think thats the big change so.
So there is a couple of different items there the impact of free rent is going to be the largest item and remember in the first half of 2020, we have the burn off of free rent period of first and you know the big development.
In the inland Empire also the back half of 2020, we had a little bit more free rent offered again these great lease transactions that Joe Joe in the Southern California team worked on.
We had a little bit of free rent with that.
There was also an impact due to the drop in occupancy and then obviously pure one is a big factor in that that building is going to be vacant for four months the back half of the year or was occupied 100% for the front half and then bad debt expense is going to be about 50 basis points.
The beta as well so those are the three large drivers that are causing the decline.
Same store NOI from the front half of the year to the back half of 2020.
Eric This is sort of I'm going to try.
Gotcha Okay.
Okay. So you know that's a big part of the drop you know keep in mind in the fourth quarter were coming from a year ago and 97.8%. So very high occupancy so just put it in perspective.
Yes.
And that 50 basis point bad debt expense that 50 basis points at that higher than last year correct not the absolute number.
Well that 50 basis points is going to be more of a drag in the back half of the year compare to the front half of the year and the big driver of that is our bad debt expense.
I think it was like $400000 on average for the first half and then the back half of the year.
I think we've got $400000 in the third quarter and $900000 in the in the fourth quarter. So the main driver of that is our guidance assumption in the fourth quarter here.
Okay, well look I mean, we're going after the call on the great.
Maybe sorry go ahead.
Yes, and I would say the bad debt expense triggered in 2019 was was very small that doesn't really have an impact on it its really.
We're more bad debt expense were factoring in the back half of the year and again, it's the guidance assumption that we that we put in our fourth quarter.
Great.
Okay. The follow up just geographically, maybe you've got maybe or can you provide some context for which markets are doing well, which others are not doing so well so looks like from your comments near peak what your peers have said that southern California kind of recovered pretty quickly and then it's a little bit maybe a teeny bit slower elsewhere, but maybe you can provide some context.
Sure.
If you just if you just look at Eric.
Eric you know kind of a lot of activity and leasing that we've done of course, so cal and that basically it.
Enclosed L.A., all the way to Elon Empire West.
In east so that's a big market overall.
We're also seeing in Phoenix has been a big.
Big performer for us in terms of leasing you see a lot of activity. There Dallas also continues to have large.
Large gross absorption Eric.
Moving on.
Florida, South Florida overall has seen also.
Hey, good absorption and then of course.
Eastern P.A. have seen a lot of absorption as well. So I mean, that's comes to mind, Eric I get what what's really kind of slowed down sit down in the second quarter and still has.
It has.
Quite of supply to we'll work through with Houston.
Great and the Midwest South that holding up.
In Midwest, it's kind of a flat to pay.
Flat to positive, meaning that you're you know you're kinda. It goes it will be you know you do have supply, but you do have demand, it's kind of treading water a bit.
Okay. One final question. So I you set your disposition target roughly the same level of prior years do you have a lot of properties under contract to sell or you just think that there's going to be a bad or you just have a lot of properties in the hopper you can sell.
We've got a lot of assets under way and in various stages of the process. So we feel pretty good about the guidance range.
You know as as last year, you may recall, we had a big flurry of closings at the end of the year. So.
The guidance range feels pretty solid.
Okay.
Investor Day.
Thank you is there thank you.
Again, Thats star one to ask a question. The next question is from Big Rodgers with Baird. Your line is open.
Yeah, I wanted to start with a follow up maybe on the concessions as well as some of the movement in South Bay, It looked like and I understand the concession comment you made earlier that they haven't really changed that dramatically, but concessions in the quarter were up quite a bit from the trend. So that has something to do with the activity that you saw in southern California and also Scott did you see any.
Hey, Glenn rent write off in the third quarter related to any of that activity.
Dave No straight line rent write offs in the third quarter and I'll turn it over to Chris on the.
Second question, Dave you know as far as the actual dollar amount and concessions.
Certainly in southern California transactions, a contributor to that I mean as far as you know George's comment about where our concessions again very consistent with that.
Quarter to a half a month per year lease term.
Okay. Thanks.
Thanks for that on the back fill up here when you guys talked about maybe a year or so that you're giving yourself.
That does that asset need a lot of capital we have to demise that at all I mean, what are you thinking of today in terms of the ability to get out.
With that very quick fairly quickly.
I want to take that.
Sure Good morning, Dave its Peter Schultz.
Have some make ready work underway at the building, but it's what we would typically do at new energy efficient lighting.
Some loading dock packages.
And the like.
Just a little bit of general clean up but nothing unusual.
We're continuing to see pretty good activity in the.
And the market, particularly from larger users where demand I would say there and in other markets has been most consistent.
But we thought it was simply appropriate to use that 12 month assumption as Scott mentioned similar to some of our other developments we've already had a couple of tours and activity.
And we'll certainly keep you up to date on our progress there.
Great. Thanks for that last question from me, maybe for Joe Joe on the investment sales market.
Where you guys had been selling assets, maybe more center of the country, let's call. It can you give us an update on the activity level any bid.
Any bid ask spread or are you still feeling pretty good about the ability to transact and the areas you want to sell most actively.
Yes.
We feel very good day.
In terms of being able to sell because the market is really strong.
Actually more buyers today than even last year and because a lot of investors are wanting to get into the industrial products space a lot of them. We find are under allocated.
And the even none.
Even in the.
In the past so into non industrial buyers are now in the market because they like the fundamentals are users or active to other taking advantage of low interest rates to get up by by properties.
For their own account so yes, so I mean.
I mean, the selling Mike it's a good market.
Great. Thanks, everyone.
The next question is from Caitlin Burrows with Goldman Sachs.
Hi, good morning, maybe on the Capex side, we saw that recurring capex increased in the third quarter, 56% year to date.
Quite as much but still up and the non leasing capex per square foot also increased year to date I'm. Just wondering if you could go through maybe what's behind these increases and if you expect them to continue.
Hey, Caitlin its Scott.
Couple of things as we think our Capex will be 38 $39 million this year, a little bit higher than what we anticipated at the beginning of the year really it's pulling forward work.
Couple of things one is on the pure one building that Peter Schultz talked about we had.
We had some work to do for instance, a roof replacement in a couple of years. So instead of doing that a couple of years out we pushed it into 2020. So that was work that we pulled forward.
Also with the additional leases that we did in southern California that we talked about in her script, we incurred additional leasing costs with that as well again instead of paying those leasing costs at expiration. We paid them now when we were able to terminate the tenants, which was a absolutely fabulous move because were able to raise.
Those rents on those buildings quite considerably.
So I would say those are the probably the two main drivers of the increase in Capex.
Got it okay. So it sounds like 20 time might be not.
A good go by.
I don't know go buy it for future years in terms of that act.
Absolutely correct I wouldn't use that as a run rate for the future years correct.
Okay got it and then just in terms of dispositions in the third quarter, excluding the Phoenix sell on the cap rate.
We're just over 9% and year to date, they've been just under 9%. So I guess going forward I'm good.
Back be additional dispositions that you're talking about doing in the fourth quarter and I guess into 2021 to have similar cap rates or are those more reflective of the specific properties that have been sold so far this year not necessarily representative of the future one.
Absolutely as Georgia, right away, absolutely more specific to this quarter.
In the end it.
In the third quarter, we sold a portfolio Minneapolis that it had peak rents and then probably flatten or come down and with significant capex. So the eight fold that we're going to get from that if we continue to own that would be much lower than the nine cap rate. So that was a.
Outlier, there and that skewed the numbers quite a bit.
Yeah, we take that cash out of that building, that's yielding less than 4% as far and put it into new developments at a five and a half six yield and you know new developments don't require capital for a long time, so that's a much better use for that capital.
Okay. Thanks.
The next question is from Rich Anderson with FMC. Your line is open.
Thanks, and good morning.
So thinking forward here.
And it kind of a post covert environment in the in the present tense and.
And then on naturally active leasing environment for E Commerce.
Inventories have been building and putting aside the dark realities of COVID-19, perhaps has been.
Tailwind more than a headwind for your business. So can you.
Can you envision a scenario where you are.
Our business actually decelerate.
After we have some sort of medical treatment and I'm sure people get back to.
At work or or are there offsets that come back to life. Yeah. Thank you. Thank you continue to accelerate things on a go forward basis. Yes. Good question, we think a lot about that so.
The jump in the trajectory of E. Commerce, obviously was caused by Covidien.
Just to say that the incremental demand from E. Commerce was more like 25% and now it's kind of 35 to 40.
The the the trajectory of the growth should stay the same it's just now a step function that step up it's very possible.
If you know we have a vaccine et cetera, and everyone's feeling a lot more safe and comfortable you know that you might see a small low in next summer when people go out to celebrate life that will certainly happen, but if they're buying product. That's also still somehow going through our spaces, but we think the you know you've got millions of new.
Adopters to E commerce, they're not going to go away and so we think thats going to continue to be very very strong tailwind going forward for for our business.
Okay, great. Thanks for that color second question is.
When does.
Excess supply matter in this business.
We can all agree that were.
Helping more than absorbing at this point in time.
And that might that might continue to widen.
But then again you know the.
Where a rent payment exists in the capital stack our expense structure on your tenants somewhat small so I'm wondering price sensitivity all those considerations when when do when do we get to a point, where yes, we got to start paying attention to the fact that there's more supply in the market than there is demand.
Yes, I would say this I mean, one of the things that we learned from the great recession.
Yeah, what you're really trying to figure out is where does the balance of power shift from that.
The right the landlord to the tenant and it's really when the national vacancy rate is something like eight or 9% now that's a very much a generalization right because if your portfolio is largely coastal in high barrier markets.
The national vacancy rate at eight or nine might not really apply to you and you know frankly, that's one of the reasons, that's where we focus our new capital so.
When you ask about when this new supplier excess supply matter that would be a general and very high level answer, but the specifics in the Submarkets and where you are and all that matters more.
Yeah.
Okay, great. Thanks very much.
The next question is from two open Sarnia with Mizuho. Your line is open.
Oh, yes. Good morning, I was just curious if you could talk a little bit about how will it affect the level of spec development.
Either increase cohort going forward given the amount of demand.
Yes. So if you as you know we don't really guide on on starts I would say that going back to my earlier remarks, you know in a in a pre covert world or a covert free world certainly development volumes, we would expect development volumes.
Across the sector to go back to kind of where they were pre cobot and there wouldn't be any specific reason why we wouldn't do the same.
Got it and then for clients that or kind of I'm, sorry that are now on the watch list, including the new one.
These all of the new ones I did kind of tenants in the industry kind of del Mar.
During Twoq earnings that industry is that a particular challenges at this point.
I would say one of them is in an industry like that and the other one again their business seems to be doing really well when we drive by so I would call that tenant more of a bad actor yeah. The larger one is the very robust business activity in the space and.
Sometimes you you know you find the bad Apple.
Understood.
Okay. Thank you.
The next question concerning Mike Mueller from JP Morgan Your line is open.
Yes, hi further.
For the JV with time and the new one you referenced the Phoenix exposure. So if that project would have been outside of Phoenix do you think you would have done it on the balance sheet.
And as a follow up how should we think about future transactions with diamond.
Right so.
It is it is.
How do I want to answer that question we.
We love Diamond for starters, and we would absolutely like to do more transactions with them. They have been a great partner and the chemistry that we have with them. Our interests are absolutely aligned so that answers that part as far as other ventures and outside of Phoenix.
Look I mean, there are certain markets, where we're not going to want to venture because frankly, we want the additional exposure and and we like the risk reward tradeoff.
And why we really really like Phoenix, you know taking down over 500 acres by ourselves in that one place on both occasions didn't seem like the right thing for us to do so it really depends on the market. Yes, we would certainly consider ventures with diamond elsewhere, but the probabilities of that happening in some of the other coastal market.
Our lower just because of our our our appetite for growth in those markets.
Got it that's good color that.
That was it thank you.
The next question is from Bill Crow with Raymond James and Associates. Your line is open.
Good morning, guys.
Two questions on Houston is a supply issue or a demand issue.
I realize this is Joe Joe it's.
It's a little bit of both although.
The demand.
Interest in our piece increase have started to pick up.
Duke you is really slowly kind of sit down and now we're seeing you know more demand, but it's also compared to other markets a little bit more of as a place to because lot of completions CDEL came in well above net absorption bill.
Yeah, Thanks, Georgia.
My other question is really on development leasing them and if you go back historically I think it's always been kind of.
Completion of construction, plus one year or was that the goal and I think it sounds like you're there again.
At least one of your projects, but it seems like the last few years, we've clawed too.
We supply and a few months and maybe even before construction completion. So are we seeing that stretch out.
Again, and if so is that a cobranded issue is that it's a supply demand issue.
Any comments there would be great.
Our our track record is clearly.
Leasing kind of zero to six months after completion, we always build in 12 months into our underwriting.
This year has been a different year.
Especially here thanks to the virus.
And so you're seeing I, what I would call Albert you know aberrations, you're seeing some thing.
Some things happened that haven't happened now this is a great real estate, we love the real estate, we love the markets. So.
So we're not worried about it but the real answer to the question is I wouldn't use 2020 is any indication of any big change in the leasing velocity and what we're building.
Okay.
That's it for me thanks.
The next question is from Eric Frankel with Green Street wonderful.
Thank you just a follow up question is there.
The reason why you projecting occupancy decline further in the fourth quarter I'm not sure we wouldn't explanation. Thank you.
Hey, Eric It's Scott I'll walk through that Theres three spaces.
Two of them are developments that we're placing in service in the fourth quarter.
What is the Dallas one is in Houston wealth product class, a but due to covance, we lost about four months in the market.
Worked for folks really weren't looking at space. So that's going to get pushed to 2021.
We also discussed on our call on her script, a new lease in southern California, with an E commerce provider that lease starts in January and Thats about 45 basis points. So those three spaces are causing the drop I would say the good news is as do you want to get back from 95 to nine.
86.3, the new leasing so Cal it's done it's signed the tenants it's going to take occupancy in January and the two new developments that are that we all have been talking about on the call are great located developments class a product will get leased up it's just going to take a little bit longer to lease them up because the cobot. So we think that.
More of a 2021 event that said those are the three drivers.
Perfect appreciate the color.
There are no further questions at this time I will turn the call over to Peter.
Thank you operator, and thanks to everyone for participating on our call today as always please feel free to reach out to me Scott or art with any follow up questions take care.
Ladies and gentlemen, this concludes today's conference call you know.
Thank you.