First Industrial Realty Trust Inc Q1 FY2020 Earnings Call

Good morning, my name is Thea and I will be the conference operator today. At this time, I would like to welcome everyone to the First Industrial First Quarter Results Conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. At this time, I would now like to turn the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Please go ahead, sir.

Thank you, Thea. Hello, everybody and welcome to our call. Before we discuss our first quarter 2020 and updated 2020 guidance, let me remind everyone that our call may include forward-looking statements as defined by Federal Securities Laws. These statements are based on management's expectations, plans, and estimates of our prospects. Today's statements may be time-sensitive and accurate only as of today's date, Thursday, April 23rd, 2020. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements, and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release, and our SEC filings are available at firstindustrial.com, under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer; after which we will open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management. One note before we begin, our team is practicing social distancing as we conduct this call. So, we apologize in advance for any slight gaps or delays we may experience, particularly when we get to the Q&A segment of our call. With that, let me turn the call over to Peter.

Thanks, Art, and thank you all for joining us today. I'd like to begin my remarks today by saying that the entire First Industrial team hopes that you, your families, and loved ones have maintained your health while we all do what's necessary to get through COVID-19 together, hopefully sooner rather than later. With respect to measuring the eventual economic impact of COVID-19 and related stay-at-home orders in the U.S., it's still early. Over the coming months, if stay-at-home orders are reduced and eventually lifted, we will gain a wealth of knowledge about how our actions impacted outcomes. While it's still early, we are extremely pleased about not only our strong Q1 results, but especially about how our team has performed during the past six weeks. I'd like to thank my First Industrial teammates who have risen to the occasion, maintaining high levels of productivity and responsiveness to our customers while largely working from home and employing social distancing practices to protect our customers, our communities, and each other. Due to the shelter-in-place orders in most of the country, the virus has significantly impacted commerce. Unemployment has increased at an alarming rate in a short period of time, and the second quarter is likely to show a significant reduction in GDP. Prior to the shelter-in-place orders, the vast majority of our tenants' businesses were doing well. So, we're hopeful that the overall economy and their businesses will bounce back as the social distancing restrictions are reduced or removed, whenever that may be. Moving now to our recent rent collection experience. I'll start by saying we value our tenants and our relationships with them. In an effort to get ahead of these conversations, in late March, we contacted a number of our tenants to make sure they were knowledgeable about the available financial relief programs from the government. In cases where our customers may not have had firmly established financial relationships, we referred them to one of our bank resources willing to assist them in the process. We also made an internal resource available to walk them through the loan application process. Through the end of March, we collected about 97% of our March billings, which was in line with what we experienced before COVID-19. For April billings, as of April 22nd, we have collected about 93%, which includes Pier 1. For April billings for which we have yet to receive payment, approximately two-thirds are in jurisdictions where currently there are moratoriums on evictions, or evictions aren't being enforced, which is negatively impacting collection. Because we're in the early phases of experiencing the economic impact of COVID-19, it's prudent to include in our updated guidance an additional $1 million of reserves for bad debt, which Scott will walk through shortly. Moving now to rent relief requests from our tenants. Including those requests from clearly well-capitalized tenants, total requests for rent relief in the form of rent deferral or abatement represented approximately 19% of our April billings. Excluding the well-capitalized tenants and only including tenants that asked for specific terms, this represents 8% of our April billings, of which approximately 85% had paid April rent. This subset occupies an average of 48,000 square feet and represents a broad range of industries. At this time, we've not granted rent relief and it's not clear how many tenants will legitimately require rent relief. We hope the range of information we've provided gives you an idea of what we are experiencing today. Needless to say, this is a point-in-time picture. We won't try to predict when infection rates will begin to decline and when or how the phase-out of the shelter-in-place restrictions will flow through to our tenants' businesses and financial health. Moving now to general activity in the leasing markets. Prior to COVID-19, there were a substantial number of new requirements across our markets, led by e-commerce and food-related businesses, but representing a broad range of uses. In our portfolio as of April 22nd, we have signed 72% of our 2020 lease expirations, which is consistent with our experience in the past several years. These signings had a cash rental rate increase of 8.4%. Over the past few weeks, we have seen leasing activity on most of our vacancies, but the pace around some of those conversations has slowed or paused. As a result, as part of our revised guidance, we have pushed out the leasing assumptions for two of our developments to the end of the year, which Scott will walk through shortly. We feel very good about the long-term prospects for our business. The COVID-19 virus has accelerated the adoption of e-commerce for many consumers for necessities as well as routine needs, which should boost future demand. We also expect an increase in inventories to provide cushion against product shortages due to supply chain shocks such as we're experiencing now. Overall, in the long run, these factors should drive incremental demand for industrial space. Moving to dispositions. We've closed on $13 million of sales in addition to the Tampa portfolio we closed in early February. Through today, we've closed on $40 million of sales this year on our way to meeting our 2020 sales guidance range of $125 million to $175 million. As we noted on our last call, we expect sales to be back-end loaded in the year. Note that our sales guidance excludes the expected $55 million Phoenix sale in the third quarter, in which the tenant exercised its purchase option in 2019. As always, our sales process is focused on maximizing value for shareholders while improving our cash flow growth profile. As we think about new investment opportunities at this point in time, we will continue to be judicious with our capital with a near-term emphasis on maintaining liquidity. We are proceeding with all of our developments in process, which total 1.5 million square feet and a total investment of $154 million at March 31st. At this time, we are not targeting any new speculative development starts. This includes the postponement of our planned summer start at First Park, Miami, where we will continue to monitor the market. Due to the impact of COVID-19, we are seeing some delays in certain of our projects as contractors and suppliers deal with shutdown orders, social distancing requirements, slower approval in permitting, and other restrictions. Of this group, only our 100,000 square foot Philadelphia development has been halted entirely due to statewide restrictions on construction deemed non-essential, although those restrictions will be lifted as of May 8th, subject to forthcoming guidelines. As a result of these delays, you will see in our supplemental page 22 that we've adjusted some of our estimated completion dates accordingly. Let me recap some recent investment activity. In February, we were pleased to acquire Nottingham Ridge Logistics Center, a $2 billion development total, totaling 751,000 square feet in the greater Baltimore industrial market, where the sub-market vacancy is under 4%. The Park has I-95 frontage and is located just 12 miles north of the port of Baltimore at the intersection of Route-43. Today, it is 15% pre-leased, and we are seeing good interest in the remainder of the space. Our total investment is estimated to be $82 million, with an expected cash yield of 5.7%. In the first quarter and second quarter to-date, we also completed the acquisition of two buildings in the East Bay market of Northern California for a total purchase price of $14 million at a weighted average yield of 5.2%. So, the first property is a 39,000 square foot in Fremont and the other is a 23,000 square foot building in Hayward. Both are in the I-80 corridor. The buildings are 58% occupied. We also acquired a 24,000 square foot building in Los Angeles in the South Bay that we plan to redevelop. The purchase price was $14.4 million. In the first quarter in addition to the First Park Miami land, we also acquired a nine acre site in Southern California in the Inland Empire East for $2 million that is developable to 189,000 square feet. On the development front, we placed in service our Ferrero Build-to-Suit Development at PV303, totaling 644,000 square feet, with a total investment of $53 million and a stabilized yield of 7.9%. With that, let me turn it over to Scott to discuss our results, our strong balance sheet position, and our updated guidance.

Thanks, Peter. Let's start with our EPS and FFO for the first quarter. Diluted EPS was $0.32 versus $0.19 one year ago. NAREIT funds from operations were $0.45 per fully diluted share compared to $0.41 per share in 1Q 2019. First quarter 2020 FFO includes our previously disclosed restructuring charge related to the closure of our Indianapolis office, and costs related to the vesting of equity awards for retirement-eligible employees we talked about on our last call. This was offset by income related to the final settlement of one of our two outstanding insurance claims for damaged properties that we previously disclosed. Excluding these items, FFO remains unchanged at $0.45 per share. First Quarter FFO also includes an approximately $800,000 non-cash write-off of a deferred rent receivable related to our lease with Pier 1 in Baltimore. We have received April's rents, but due to the economic uncertainty caused by the COVID-19 virus, we feel this write-off is prudent. We are now assuming Pier 1 will pay rent through June and vacate the building, the impact of which I will walk through shortly when I discuss our revised 2020 FFO and portfolio guidance. Our occupancy was strong at 97.1%, down 50 basis points from the prior quarter and down 20 basis points from a year ago. As for leasing volume during the quarter, we commenced approximately 2.6 million square feet of leases; 459,000 square feet were new, 1.3 million were renewals, and 925,000 square feet were for developments in acquisition with lease-up. Tenant retention by square footage was 68.9%. Same-store NOI growth on a cash basis, excluding termination fees was 8.4%. Lower free rent on developments accounted for about half of that growth. The remainder is attributable to rental rate bumps and increases in rental rates from new and renewal leasing, which were partially offset by a slight decrease in average occupancy. Cash rental rates were up 10.8% overall, with renewals of 8.9% and new leasing 16.1% and on a straight-line basis, overall rental rates were up 26.5%, with renewals increasing 27.1% and new leasing up 24.8%. Now, moving on to the balance sheet. At March 31, our net debt plus preferred stock to EBITDA was 5.2 times. Today, we have approximately $70 million of cash and $400 million of availability on our line of credit for total liquidity of $470 million from a debt maturity standpoint. We have very little coming due in 2020 and 2021. In 2020, we recently paid off a $50 million mortgage loan and have no other debt maturities the remainder of the year. In 2021, we have a couple of debt maturities. First, we have a $200 million Term Loan that matures in January at an interest rate of 3.39%. With a handful of banks with which we have relationships spanning many years, we contemplate renewing this term loan inside of the expiring interest rate. After that, we have our line of credit coming due in October but note that the maturity date for the line is extendable for one year at our option, which enables us to push this maturity to October 2022. Lastly in 2021, we have $63 million of mortgage debt coming due in October that we can pay off using the availability in our line of credit. If the debt capital markets are cooperative, and uses of capital, we anticipate development spend of approximately $100 million for the remainder of 2020 and $35 million for 2021 for a total of $135 million. These capital needs will be funded with property sales and excess cash flow after the payment of our dividend given our AFFO payout ratio is calculated in our supplemental at 66%, which is one of the lowest in the NAREIT world. Moving on to our updated 2020 guidance for our earnings release last evening. Our general assumption for our guidance is that the U.S. begins to return to work in early summer. Our NAREIT FFO and FFO before one-time items guidance are both $1.73 to $1.83 per share with a midpoint of $1.78. This is a $0.05 per share decrease compared to the midpoint of FFO before one-time items guidance that we discussed on our fourth-quarter earnings call, primarily due to a decrease in forecast and NOI due to the following. We are now assuming that Pier 1 pays rent through June 30 and vacates. At this time, we expect no income from this building after June for the remainder of the year. This plus the impact of the write-off of the non-cash deferred rent receivable is about $0.02 per share. We have also reduced our assumption for average quarterly occupancy by 100 basis points to a midpoint of 96.5%. This reflects the pushback of our leasing, including Pier 1 as I just discussed, and the lease-up of our remaining vacancies to the fourth quarter, at First Joliet in Chicago, and building B, at First Logistics Center at I-78/I-81 in Pennsylvania. Excluding the FFO impact of Pier 1, this change in leasing assumption represents an additional $0.02 per share. Lastly, we are increasing our bad debt expense assumption from $500,000 per quarter to $900,000 per quarter for the remainder of the year, which is a penny a share, including the $300,000 of bad debt expense we recognize in the first quarter. Our bad debt expense assumption for 2020 is now $3 million, an increase of $1 million from our prior guidance. Please note that guidance does not reflect any potential non-cash write-offs of deferred rent receivables related to tenants that are having financial difficulties. Other key assumptions for guidance are as follows: same-store NOI growth on a cash basis before termination fees of 2.75% to 4.25%, a decrease of 125 basis points at the midpoint due to our updated occupancy and bad debt assumptions. Our G&A guidance remains at $31 million to $32 million; guidance also includes the anticipated 2020 costs related to our completed and under-construction developments at March 31st. In total, for the full year 2020, we expect to capitalize about $0.04 per share of interest related to our developments. Our guidance does not reflect the impact of any other future sales, acquisitions, or new development starts after this call other than the expected third-quarter sale of the building in Phoenix for which the tenant exercised its purchase option. The impact of any future debt issuances, debt repurchases, or repayments after this call; the impact of any future gain related to the final settlement of one insurance claim from a damaged property, 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, again, let me thank the entire First Industrial team for their excellent efforts during this unprecedented time. We, like all of you, look forward to getting back to normal soon. As a company, we built our business to perform through the cycle and particularly for unexpected times like these. Through disciplined risk management in our investments and operations, top-rated customer service, a high-quality infill portfolio, and a strong balance sheet, we are well-positioned to succeed in this turbulent environment. Lastly, we are focused on serving and working closely with our customers for as long as it takes to find the optimal outcome for all involved. With that, we will now move to the question-and-answer portion of our call. We ask that you please limit your questions to one plus a follow-up and then you're welcome to get back in the queue. Operator, would you please open it up for questions?

Thank you, sir. Our first question will come from Dave Rogers with Baird. Please go ahead.

Yes, good morning everybody. Thanks for all the detail on April rents wanted to start there if I could. I think Peter, you said 19% of April billings requested relief, and I want to verify that that was correct. And then also is that on a dollar of rent basis or was that on a percentage of lease basis? Maybe I was confused about that. And then can you dive a little bit further into what you said, requests for specific terms? And kind of how you clarified that and how you're looking at that? And then I'll have a follow-up. Thanks.

Sure. First of all, the 19% is based on dollars. Secondly, in terms of requests, some asked for deferrals, while a few requested abatements, and typically these were for a two or three month deferral.

Okay. How do you plan to address some of those issues? I believe you mentioned that you haven't implemented any of those to date. As you move towards May, how confident are you in this regard? Also, considering the Pier 1 situation as part of the same store pool, which you're rolling out on July 1st, you haven't provided any deferrals yet. How do all these factors come together as you look toward the end of the year, particularly with Pier 1, the outstanding bad debt, and your stance on potential deferrals? I apologize for the numerous questions.

Sure. So, as you pointed out on Pier 1 in the math, with respect to the rents that we have not yet received, some will undoubtedly be granted some kind of relief. Some may end up in bad debt. And right now, it's interesting, Dave, every day we get a red check from somebody who either asked for relief or who flat out told us they're not paying rent. So, this is a really fluid situation. In terms of any relief that we may provide, we're going to try to recover that rent in 2020. So, that shouldn't have any impact on same-store, either.

Great, thanks. I'll jump back in.

The next question will come from Craig Mailman with KeyBanc Capital Markets. Please go ahead.

Hey guys. Just on the bad debt. So, the $1 million increase, if you assume that Pier 1 is about a $1.5 million a year, should we assume that a portion of their rent was already kind of assumed in that bad debt. And as we think about the balance of the year, if you had, $300,000 plus the $1.5 million at the back end, that's, roughly $1.2 million for the remaining three quarters, is $400,000 of bad debt a quarter sufficient you think in this environment or kind of just thoughts on that?

Thanks, Craig. I'm going to ask Scott to cover that question for you.

Hey, Craig. The non-payment of rent at Pier 1 and the vacancy are not expected to affect our assumption of $900,000 per quarter for bad debt. However, if we bill rent in May or June and fail to collect it, that will influence our bad debt expense. For the second, third, and fourth quarters, our established bad debt expense guidance remains at $900,000. To arrive at this figure, we reflected on our experiences during the Great Recession, notably from 2008 to 2009 when bad debt expense was around 85 basis points of gross revenues. Therefore, we believe that the $900,000 per quarter represents about 85 basis points of our gross revenues for those quarters. We also considered that with COVID-19, conditions might worsen compared to the Great Recession, but over the past decade, we have significantly enhanced our portfolio and tenant quality. Specifically, we've divested many buildings with numerous tenants, and our current average tenant size is about twice what it was a decade ago. Because of this improved tenant and portfolio quality, we believe that had we maintained the same portfolio from 2008-2009, our bad debt experience would have been lower than 85 basis points. Thus, we feel confident about the $900,000 per quarter target we set for bad debt expense.

Got you. So, the Pier 1 is kind of coming out of occupancy, not necessarily being treated in bad debt?

For the last half of the year, correct. If they don't pay me in June that will come out as bad debt.

Right. Okay. And then just separately. Peter, you mentioned that spec starts here are kind of a no-go, but just bigger thoughts on development, even as COVID kind of dissipates the impact there. I mean do you revisit the spec construction cap that you guys raised a couple years ago? Does that get kind of throttled back a little bit or just given the size of the company, maybe that kind of stays and just kind of thoughts generally on your appetite for spec?

Sure. With respect to the cap, I guess I'll say, remember, it's a limit and not a target. So, the market environment absolutely drives our decision-making and our underwriting. It isn't really whether there's capacity under the cap. There is about $135 million of capacity under the cap today. And the level of the cap of $475 million theoretically could be higher given the way we've typically established that cap, but we don't have any plans to increase it obviously in this environment. But again, it's not a target and rationality prevails here.

The next question will come from Rob Stevenson with Janney. Please go ahead.

Good morning, Scott. Based on what you achieved in the first quarter and the revised same-store guidance of $2.75 to $4.25 for the year, are you anticipating that deferrals and other factors could lead to negative cash same-store results at some point in 2020?

No, as Peter mentioned earlier, any rent requests that we grant in 2020, we're making the assumption that those are going to be paid back by the end of 2020. So, as a result, there wouldn't be any impact on our same-store.

So what, I mean, other than Pier 1, what drives down the reduction in guidance, given where you are now with the first quarter already in the bag?

Yes, I'll just reconcile you from what our guidance was before. On our fourth-quarter call, we said our same-store guidance midpoint was going to be about 4.75%, about a 1% offset has to do with our new occupancy assumptions. So that's having to do with Pier 1 vacating June 30 and not paying for the remaining six months, and other just decline in occupancy in the portfolio, and then that's offset by another 0.3% related to our additional bad debt expense that we discussed in our guidance. So those two pieces get you pretty close to the 3.5% same-store midpoint that we currently are guiding on for 2020 cash same-store.

Okay. So if you have leasing occurring before the fourth quarter and your bad debt expense is running you as high as $900,000 per quarter, there's upside to that number.

That's correct. Absolutely.

That's right. And as we mentioned before, individual cases of deferral can be structured in a way that protects our cash flow. So, we are being diligent on that front.

Okay. And then Peter or Jojo, what are you guys looking for, if you are going to grant deferrals? Are you guys just doing straight up furloughs? Are you guys going to be asking for rent bumps, additional term, other types of credit enhancements, etc. for granting any of these deferrals?

That's a lease-by-lease, tenant-by-tenant conversation. It really depends on their particular situation. Obviously, we're getting involved in their financials and looking into their liquidity and their ability not only to pay rent now, but in the future. Based on that, what that concludes, that's how we'll respond with relief that we think is a win-win for them and for us.

The next question will come from Ki Bin Kim with SunTrust. Please go ahead.

Thanks. The 7% uncollected rent in April, can I assume that 7% deferrals and what percent of the deferrals is actually making it into same-store NOI assumptions, I'm assuming the percentage not meeting the 7% or 5% of collectability threshold and such?

Hey, Ki Bin, it’s Peter. I'll start and then I'll turn it over to Scott. We want to make sure that everybody is comparing that 93% apples-to-apples. And so I'm going to ask Scott to go through the 97% and what that means. And then the 93% and the gap, that the apples-to-apples gap is 4%. And we'll get into the answer to what happens to that 4% after. Scott?

So Ki Bin, we received a couple of questions on this, as Peter mentioned. We shared a statistic during our call indicating that we collected 97% of our March rents by the end of March. Currently, we are at about 99%. In our business, with portfolios as extensive as ours, it's common for tenants to take longer than 30 days to pay their rent. This could be due to working capital issues or new tenants who need a little more time to make their initial payment. Regarding the 93% statistic we provided, that pertains to April collections, and as of today, we are close to our prior COVID-19 experience, where we collected about 95%. This leaves 7% remaining, and we have another week to collect that, so we hope that number will increase. The remaining percentage will be evaluated on a case-by-case basis to determine if we should allow rent deferrals. As for your last question, we reported in the script requests with specific tenants, excluding those with strong balance sheets, that the percentage was 8%. However, 85% of those tenants have already paid their rent, indicating a disconnect between the number of tenants requesting assistance and those who have not paid for the month of April.

Yes. I think I'll have to go through a transcript on that one. But so…

I guess the bottom line is this: the 93% that we're talking about; that number could go higher. Whatever's left over from April we will make a tenant-by-tenant decision to determine if we need to do rent deferral. I think that's the easy answer.

Okay.

Again, apples-to-apples, that 93% today compares to 95% pre-COVID today, and at the end of the month, that 97% March compares to whatever the number is for us in April, a week from now. So, the gap is not that big is really the point.

Yes. I missed the opening remarks. So, thanks for that. When you look at your tenant profile, I'm not sure what the best way is to slice and dice it, but how do you categorize what you consider at-risk tenancy? And I'm not sure if there's an element of looking at your tenants as smaller tenants or larger tenants, and if that really matters to gauge risk profiles, but any kind of color you can provide there?

Sure. Instead of focusing on occupancy size, we examine the size of the companies and the nature of their business operations. It’s no surprise that businesses whose revenues heavily rely on outdoor activities, like sporting goods, boat services, furniture sales, flooring, and catering, are struggling. Since gatherings are not happening, these companies face significant challenges, and they are the ones experiencing the most difficulty.

Okay.

Did I answer your question?

Yes. I'm not sure if you want to provide on an open call, but like do you have a sense of what percentage that makes up your ABR?

The total balance is about $1.4 million in terms of tenants getting to the apples-to-apples comparison, within that number exist some of those businesses.

Okay. And just last question any Pier 1 type of tenants on the horizon that you're concerned about? I'm not sure if the automotive section is a risk or not like Harm Automotive?

I’m Scott. I would say no. We reviewed our March bad debt calls and will go through our April bad debt calls in early May, but as of now, I don't see any Pier 1 tenants coming up. With Karma, we do have a significant security deposit that they provided when they leased from us, so that gives us credit enhancement for that tenant.

Okay. Thank you guys.

The next question will come from Rich Anderson with SMBC. Please go ahead.

Thanks. Good morning everyone. I hope everyone is doing well. I have a question regarding the April rent. If I may ask, will you be booking all of it? Let's consider April as part of the full second quarter for simplicity. When you report your second quarter results, will 100% of the rent be booked even if a small portion hasn't been paid, or will there be adjustments due to rent deferrals? Additionally, when do you start to engage a bad debt contra account? What is the process for reporting bad debt in this context? So, I have three points: cash rent, rent deferred, and bad debt. How does all of this tie together?

I got it. So let's just assume that April is the end of June. We're at 93% and it doesn't grow. We think it's going to though. What we would do is we would evaluate that 7%, we're either going to work with the tenants to assume deferral on it and if the tenants are creditworthy we think we're going to get paid back over the payment period, there would be no establishment of bad debt expense. And there might be other tenants that we don't establish bad debt expense, it might pay us, it is example sometime in July. So, for bad debt expense to be triggered, we have to make the evaluation, that there really isn't any chance based upon the company's business, their liquidity based upon discussions that we're not going to get anything from them for their outstanding receivables. And at that point in time, we would then take the bad debt expense reserve.

Okay, great. That's helpful. Now, what happens if you give a deferral, but you conclude that the payback won't happen this year? What happens to the number if it might happen next year?

Okay. But you're asking, if that situation happens. What's the impact on bad debt?

No, I'm not asking that. I'm asking. If there's a rent deferral and you deem it pay back a year from now, how does that impact? How would you report second-quarter revenue?

If we were to report the revenue, it would likely be on a straight-line basis, and we would conduct the same evaluation. If the tenant payback period is a year, we would need to assess whether we expect to recover that money within that year. Essentially, it's the same analysis. Ultimately, we would need to investigate further if the payback period is a year since we are assuming more credit risk in that scenario.

Thank you for that. My second question is regarding your press release about the exclusion of the write-off for deferred rent. Does this indicate that there is an increasing number of tenants that you have transitioned from gap to cash due to the potential collectability of rent in the future? Should I interpret it that way?

That has nothing to do with the rent deferral discussion, we're talking about. With our example, when we talked about in the script, we said, we wrote off $800,000 of a deferred rent receivable or straight-line rent receivable related to Pier 1. Under GAAP accounting, net receivable builds up over time and it decreases at the end of the lease. Since we made the assumption that we're not going to receive any more rent from Pier 1 one, we wrote that off. So that's just meant to specifically address deferred rent receivables that have built up since the start of the lease. And the reason that we didn't guide on it, was very difficult for us to come up with what a projection of that would be. If you have a tenant, and you're at the back end of the lease, and you have a bad debt issue, that number is going to be very small. But if you have a tenant at the front end of the lease and you have a bad debt issue, that deferred rent receivables is going to be a lot higher, because of possibly free rent periods and rent bumps. So, as a result, we're not including that in our forecasted guidance because it really is too difficult to project, whereas, cash statistics, we have a 20-year history or 25-year history with the company.

Understood. Thanks very much. Appreciate it.

No problem.

The next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.

Yes. Thanks. I just wanted to follow-up on the bad debt assumption, Scott, when you went through it, it sounded more like that you're just performing a model exercise. Have you? Are you tracking any specific tenants? That would be a concern, or you're just kind of thinking, okay, this is what happened historically. And we're going to increase that because the current environment looks a little bit more disruptive in the near term.

Yes. When considering our situation as of April, there was a question about any Pier 1 locations. We're not aware of any, and we don't have sufficient payment history, either pre-COVID or post-COVID, to establish a reliable run rate. We looked back to the toughest period in the company's history, which corresponds to many companies during the Great Recession, and used that as a reference point. Based on the improvement in our portfolio and the quality of our tenants, we believe our bad debt allowance is sufficient. Currently, we don’t foresee any major issues ahead, but it's important to note that we are only one month into this COVID-19 experience.

Okay. And have you started analyzing, I guess, the validity of the 8% of tenants that provided the details on their rent deferrals and do you anticipate providing any of those or guess what some of the factors that you're going to look out for that?

Well, what I would say is this on the 8%. That's who made requests, a large portion of those, Mike, already paid April rent. So we're not really engaging those clients just because they've already paid April rent. So anyway, there's a de minimis amount on that list, which is about 1%. That's unpaid. So that 1% is probably the tenant base that we have to possibly go back and engage in a rent deferral conversation.

Okay. Do you think that those same tenants will come back and ask for deferrals in May? I mean, would they restart the conversation or would you start the conversation with them? Here in the near-term?

I think we would wait for them to restart the conversation again. For us, the vast majority of the tenants on that 8% lease list already paid April rent. So, there really isn't a reason for us to go back and engage them. But they might come back and ask for rent relief. And again, we'll just have to take care of that on a tenant-by-tenant basis.

Yes. Great, thank you.

The next question will come from Sarah Tan with JPMorgan. Please go ahead.

Oh, hey, actually, it's Mike. I got disconnected when Q&A started. So I apologize if this was asked already. But two things: First, do you anticipate any issues with the disposition targets given the current climate? Could you comment on that? And when you mention a pause in development, is it safe to say that includes the Value-Add acquisitions as well?

So, regarding sales guidance, we have sold 40, which means we need another 110 to reach the midpoint of our range. There is still demand from users and investors for industrial assets. The question is how long the hesitation will last. That’s why we indicated that we expect these sales to be back-end loaded. During the Great Recession, we managed to sell between $100 to $200 million a year despite the challenges, and the assets we sold then were not as appealing as the ones we may need to dispose of now. We feel relatively optimistic about it, but of course, we will see. No one can predict how long or how severe the economic disruption will be. I'm sorry, what was the second part of your question?

But just want to make sure that aspect developments, when you talk about putting a pause on spec development that included making the Value-Added acquisitions as well for you buy, say, a vacant building lease it up.

Yes. Well, I mean, again, the emphasis is on maintaining liquidity until we have a clearer picture about the duration of this disruption. And again, you know, Mike, I can't say we wouldn't do any Value-Add; it depends, obviously, a huge one we probably wouldn't do, given that conflicts with our objectives on the liquidity front.

The next question is a follow-up from Dave Rogers with Baird. Please go ahead, sir.

Yes. Before we wrapped-up, I did want to talk a little bit about demand that you might be seeing in the last month, two months, you know, since the COVID outbreak happened, and maybe diving a little bit deeper on that is what are you seeing in retrospect, versus prior periods maybe in April? What types of tenants? What size of either tenant or size of space? Are you still seeing activity? And then maybe the second question is, as you look out, you guys talked about the economy maybe opening back up in the early part of summer, but what have you done in your own modeling and you're thinking about when you expect really leasing activity to recover in earnest? So those would be my two follow-ups. Thanks.

So, I'll start out and then I'll kick it over to Jojo, just to reiterate, you know, in terms of leasing activity, that's 72% of our 2020 rollovers that we've signed is actually a couple of points ahead of the prior two years. And we're showing pretty good rent growth there. So, we're pleased with that. So there is activity. Jojo, do you want to add some details?

Sure. Pre-COVID performance has been very strong, and I won’t elaborate further on that. However, during COVID, certain industries have particularly thrived, especially those related to e-commerce and food, which needed improved delivery services for essential goods. Reverse logistics has also gained momentum due to increased returns, as anticipated with the rise in e-commerce. Additionally, there are some immediate needs arising from products entering the market that aren't being fully purchased, which has created demand for short-term space.

Hey, David. Its Peter Schultz I would add to what Peter and Jojo said in addition to e-commerce and food and beverage, medical and cleaning supplies as well. And to your question, it's really been across space, sizes, and geography and while clearly decision-making has slowed and some requirements have put on pause, we continue to see new RFPs from prospective tenants, as well as existing tenants that are expanding. And while there's no doubt that in-person inspections have slowed, business is still happening.

Does that answer your question, Dave?

Yes, thanks for all that. And then the just the second part of it in terms of kind of how do you see the economy reopening, you're talking about maybe early summer, but then what do you think happens with leasing post that, are we back to normal? Does it take until 2021 to hit the ground? What's your at least base assumption here a month in?

Yes, as Scott mentioned in his remarks, we anticipate starting to reopen and return to work in the summer. This will clearly be a phased process, and there may be some challenges along the way. It's difficult to predict exactly how it will unfold, but we expect a gradual return to normalcy. If the medical community is able to develop treatments quickly, that could speed up the recovery. Conversely, if we end up waiting 18 months for a vaccine, that will affect the recovery pace differently. Overall, people are eager to return to work, but we must ensure that it's done safely, and none of us can know how long that will take.

Yes. Thank you all.

The next question will come from Eric Frankel with Green Street Advisors. Please go ahead.

Thank you. I apologize. I think I disconnected myself early in the call. Most of my questions are answered regarding bad debt and your expectations for the year. But maybe you could talk about just industry diversification in your rent roll and what industries you're probably disproportionately exposed to?

It's a pretty granular tenant base. We don't have large exposures. If you look at our top 20, nobody's really that large relative to the rest. In fact, I think our top 20 is about 22% of our rent roll. So, it's hard to say, but we really don't have concentrations. We do have some exposures to businesses that will not fare well in this kind of economy. But the vast majority are doing pretty well and certainly have the wherewithal and the longevity to get through this.

Is there any percentage you could point to regarding kind of those industries that are not doing well, non-essentials or luxury items or entertainment, or however you want to describe those businesses that are struggling, do you have a rough sense of what proportion that is of your tenant base?

All I can say is it's not large; it's small. We don't have the percentage of that in front of us.

Okay. Thank you. Two quick follow-up questions. One, you have a fair amount of your portfolio in the South Bay in Southern California. Maybe you just talk about port activity and the kind of supply chain disruptions and how that's affecting tenants and activity around the port.

Sure, yes. Jojo, you want to cover that question?

Sure. Thanks, Peter. Regarding South Bay, port volumes have decreased, particularly in relation to containerized cargo and loaded imports. While we still observe incoming containerized cargo that requires storage, South Bay is currently around 1% vacant, indicating a very tight market. However, there are supply chain disruptions to consider. Additionally, interest and tour activity have diminished, although we continue to respond to RFPs. At the moment, much of the activity is centered on e-commerce companies that need proximity to population centers. The market remains constrained, especially for existing tenants due to the extremely low vacancy rates, which limit their options for relocation. This captures the current situation in South Bay.

Thanks. I'd like to ask a quick follow-up question about your recent acquisition in Baltimore. I understand this deal was in the works for some time, but it appears you have significant leasing exposure in that area. Could you share your investment thesis for that market and how tenant activity is going for both Pier 1 and Nottingham?

Sure. Eric, good morning. In terms of our thesis, the Baltimore market has been a strong performer with record low vacancies and absorption. If you look at the sub-markets along I-95, north of the tunnel, where we just acquired these assets, the vacancy rate is below 4%, and it has driven most of the absorption over the last several years, totaling over 21 million square feet. The two buildings we purchased have been in the works for over a year. They were constructed to our specifications and offer excellent visibility on I-95 with easy access from that exit. The site was a former retail space that was rezoned for this project, making it a prime location. As mentioned in the script, we have 15% pre-leased, having signed those leases right before closing, and we're currently working on the tenant improvements. We're pleased with the interest we've received in the rest of the project and expect to outperform there. To give you a bit more detail, the larger building is 585,000 square feet with a 36-foot clear height, while the smaller building is 166,000 square feet with a front park rear load design, and over two-thirds of that smaller building has pre-leasing activity. Regarding Pier 1, we've not received any indication that they're planning to vacate. They are actively fulfilling online orders and direct-to-customer deliveries, so we believe that assumption is sensible. As we've stated in previous calls, we are comfortable with our re-leasing exposure, given the strong market dynamics and ongoing demand. I hope that answers your question.

We do have time for one final question. That question will come from Craig Mailman with KeyBanc Capital Markets. Please go ahead, sir.

Hey guys. Thanks for the follow-up. I just want to confirm that it doesn't seem like there’s a security deposit application to 93% collection.

Yes, that's correct. The payments are coming in from tenants, and there is no impact from security deposit applications.

Okay. And then just Peter on your commentary around kind of two-thirds of uncollected rents in areas with moratoriums, are you seeing kind of well-capitalized companies taking advantage of these eviction waivers, or is it mostly kind of companies you would have expected anyway?

It's a mixed situation, and I want to be cautious about suggesting that people are necessarily taking advantage. While some might be, it's generally not in their best interest to engage in such behavior since it can lead to negative consequences they would prefer to avoid, such as judgments or the potential for us to draw down their security deposits or letters of credit. Additionally, they risk losing other rights in their leases, like renewal options. Therefore, we emphasize that a significant percentage of those who have received payments are in those jurisdictions, which could be a relevant factor.

Great. Thank you.

At this time, I would like to turn the conference back over to Peter Baccile for any closing comments.

Thank you, operator, and thanks to everyone for participating in today's conference. We appreciate very much your questions and interest in our company. Please feel free to reach out to Scott, Art, or me with any follow-up questions. We hope to see you soon and in the meantime, we wish you and your families good health.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.