Prologis, Inc.

Welcome to the Prologis Q1 earnings conference call. My name is Mariamma and I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question during this session, please press star, then one on your telephone. If you would like to withdraw your question, please press the pound key. Also note this conference is being recorded. I'd now like to turn the call over to Tracy Ward. Tracy, you may begin.

Thanks, Mariamma, and good morning, everyone. Welcome to our first quarter 2020 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations. I'd like to say that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates, and projections about the market and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guaranteed to performance, and actual operating results may be affected by a variety of factors. For a list of those factors, please refer to the forward-looking statement notice in our 10K or SEC filings. Additionally, our first quarter results press release and supplementals do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we've provided a reconciliation to those measures. This morning, we'll hear from Gene Riley, our Chief Investment Officer, who will comment on real-time market conditions, and Tom Olinger, our CFO, who will cover results and guidance. Hamid Moghadam, Gary Anderson, Chris Katen, Mike Curliss, Ed Neckritz, Colleen McEwen, and Tim Arndt are also here with us today. With that, I'll turn the call over to Gene, and Gene, will you please begin?

Thanks, Tracy. We appreciate everyone joining us today, and we hope you and yours are all well. We're glad to report that our teams are healthy and working productively on a remote basis. Our first quarter was very strong in all parts of the business, and Tom will cover these details. I'm going to focus on what we are seeing right now in our outlook for the year. While we are just 30 to 90 days into the COVID economy, we are seeing short-term effects play out very differently across our customer industry sectors. At this time, roughly 60% of our customers are growing, and 40% are shrinking. Next week, Chris Katen will be issuing his fourth COVID white paper, specifically on this topic of customer demand segmentation. At the extreme end of the spectrum, categories like food and beverage and consumer staples have sales up significantly, and conversely, clothing, sporting goods, and home furnishings are all down sharply. Our customers in contraction are going through a short-term shock. Some will recover fairly quickly, others face a longer transition to normalcy, and unfortunately, certain businesses will not survive. At the same time, the pandemic has led to significant growth for the industries I mentioned serving the -at-home economy, and we continue to experience elevated e-commerce demand, a 40% share of new leasing versus 23% pre-crisis. With the benefit of customer dialogue and applied research, we factor in tailwinds and headwinds to arrive at our revised 2020 earnings guidance. Our portfolio quality, customer composition, and balance sheet strength are mitigating the headwinds, and our disciplined efforts to dispose of 15 billion of non-strategic assets over the past several years, that is paying dividends today. Turning to the long-term impacts, we believe some of the changes brought on by the pandemic will be durable. COVID is very likely to accelerate a share shift from brick and mortar to e-commerce retail. We also believe the growing importance of safety stock will lead to higher global inventory levels over time. These trends will increase demand for logistics real estate in the long term, but will also have a positive effect on 2020 activity, and we're already seeing this. Chris and his team have updated our forecast for logistics real estate market fundamentals, and now expect the following for full year 2020. In the US, supply will total 225 million square feet and 18% -over-year decline. US net absorption will total 100 million square feet, the lowest level since 2010, and a 55% -over-year decline, driving the vacancy rate up 90 basis points to 5.4%. Europe will have similar reductions in the supply and demand, resulting in a 130 basis point vacancy rate increase to 5.2%. Japan's vacancy rate will increase from a record low of 1.4 to 2.8%. In summary, occupancies in all geographies will decline, but also in the year at very healthy levels historically. Our proprietary leasing data shows that the spike in leasing activities we witnessed in March and talked to you all about a couple of weeks ago has settled down. We are now seeing volumes generally in line with historical trends. Forward-looking data continues to be encouraging. During the last 30 days, we've signed 198 leases amounting to 17.5 million square feet. That's up 21% -over-year and roughly flat adjusted for portfolio size. Our lease proposal generations are up 21% -over-year. Lease negotiation gestation periods for new leases have declined by about 14 days -over-year. And retention was just over 80%, a couple hundred basis points higher than comparable historical periods. After slicing the data in several different ways, we see three clear things at this point. First, essential consumer product sectors are driving the demand. Second, e-commerce is driving demand across industry sectors. And third, our larger customers are sharing much better than smaller customers in this environment. Now an update on rent relief requests. Growth has slowed here and to date we have received requests representing .3% of gross annual rent. Of these requests, 70% were not granted, 23% remain under review, and 7% have been granted in the form of rent deferral loans representing 27 basis points of gross annual rent and an average of about 33 days of rent per customer. As mentioned on our last call, this relief is targeted at our smaller customers who legitimately need sending from COVID and not for opportunistic requests.

We believe

the total rent deferral loans granted will eventually amount to about 90 basis points of gross annual rent with these loans scheduled for repayment over the remainder of 2020. Turning to the strategic capital business, our investors remain very positive on the logistics real estate sector. As noted on our last call, the vast majority of redemptions to date were in progress prior to COVID-19 and there appears to be good secondary market interest for some portion of the redemption activity. But to date we have seen no trades on the secondary market. Next I'd like to provide some context for the updated capital deployment guidance in more detail at the moment. This guidance assumes virtually no incremental activity in acquisitions, business decisions, speculative development or contributions. Rather than speculate on future market conditions, we are guiding to volumes that have largely been accomplished already. Most of the volume predicted between now and the year end is built to suit activity where the pipeline remains active for multiple leases signed post-COVID actually. We continue to work closely with customers and municipalities on 30 ongoing projects in 14 markets. Construction continues on 22 of these projects with eight having been halted by local authorities. And to date we have yet to stop a project at the request of a customer. While our current leasing data is holding up very well and we see extremely encouraging trends with e-commerce leasing, we are planning on a reduced demand environment through the end of 2020. We will have opportunities to serve our customer segments in expansion mode and we will need to support others not so fortunate. We expect to serve as a reliable alternative for -to-suit customers, take advantage of investment opportunities as they emerge and manage our strategic capital vehicles prudently and opportunistically in this environment. And with that, I'll turn it over to Tom.

Thanks, Gene. First and foremost, I want to echo Gene's introductory comments and wish you and your families the best of health during these challenging times. I'll briefly discuss Q1 and then take you through our updated guidance. Starting with results, 4 FFO for the first quarter was 83 cents a share which was in line with our pre-COVID expectations. We did recognize an expense of $5 million in the quarter or a little less than one cent per share related to our donation to the Prologis Foundation for COVID-19 relief efforts. During the quarter, we completed the acquisition and integration for both the IPT and Liberty portfolios. We hit our synergy targets and both portfolios are performing well and in line with our expectations. We leased 34.7 million square feet in the quarter with ending occupancy of .5% down 100 basis points sequentially as expected. Rent change on rollover remains strong at 25% and was led by the US at 31%. Our share of cash same store in a wide growth was .6% which was about 30 basis points above our forecast. Same store average occupancy for the quarter was 85 basis points, lower year over year, again, consistent with our expectations. As of yesterday, we've collected 85% of April rent which is in 1% of our normal pace. Rent due dates vary by country and about 5% of our rent isn't due until the back half of the month. As Gene noted, we've granted $18 million in rent deferrals, $9 billion of which relates to April. All granted deferrals are structured to be repaid in 2020. For employment, we started $300 million in new development projects which were 85% pre-leased. Stabilizations were $690 million with an estimated margin of 39% and value creation of $270 million. Additionally, we realized more than $280 million in development gains through early April. Looking to the balance sheet, we enter this crisis in a position of strength with significant liquidity and borrowing capacity. Liquidity at quarter end was $4.6 billion and we have cleared out our debt maturities until 2022. The combined leverage capacity for Lodges and our open-ended vehicles at levels in line with current ratings is well over $10 billion. Turning to guidance for 2020, our approach is twofold. First, to exercise prudence and second, use a broader range of outcomes given the uncertainty. While the full economic impact is difficult to quantify, our guidance assumes reduced demand into the third quarter with the operating environment beginning to recover towards the end of the year. Here are the key components of our guidance on an R-Share basis. Our cash seems to run away. We are decreasing the midpoint by 225 basis points and now expect growth to range between 1.75 and 3.25%. The decrease in the midpoint assumes average occupancy will be between 94.5 and 95.5%. We expect retention to increase about 500 basis points and be in the mid 70% range. We are estimating bad debt expense to range between 100 and 150 basis points of gross revenues. The midpoint of 125 basis points compares to 20 basis points of bad debt expense embedded in our prior guidance. It is important to note this bad debt midpoint is on an annual basis which means we have reserved a minimum of $1.5 billion in much higher percentage based on the remaining 2020 revenue, particularly if our positive cash collection trends continue. As we discussed in our call earlier this month, our bad debt expense peaked at 56 basis points during the GFC. At the midpoint, our annual guidance for bad debt is more than double that historical high and almost three times that level at the upper end of the range, again on an annualized basis. As Gene mentioned, we believe rent deferrals granted will amount to about 90 basis points. While we expect these deferrals to be repaid, we have factored in the potential for credit loss for the deferrals as well as elsewhere in the portfolio. We have included the impact of downtime resulting from potential bad debt in our occupancy forecast. We're assuming no rent growth for the remainder of the year. Rents for lease assigned since March 1st have been about 200 basis points ahead of our expectations while rents for lease assigned in the first two months of this year were about 100 basis points better. We expect rent change to be in the mid 20% range. And keep in mind our in place to market rent spread is currently approximately 15%. For strategic capital, we expect revenue excluding promotes to range between 345 million and 355 million dollars, down five million dollars due to lower forecasted deployment by our funds. We are maintaining our net promote income for the full year of 15 cents per share based on quarter end valuations. The vast majority of the 2020 promote revenue will be recognized in the second quarter. For net G&A, we're forecasting a range between 270 million and 280 million dollars, down five million dollars at the midpoint. Our G&A for the year is down about 10 million dollars due primarily to lower G&E offset by the five million dollar contribution to the foundation. From a foreign currency standpoint, we continue to be extremely well insulated from FX movements through the next three years. And our US dollar net equity is over 95%. As Gene mentioned, we stopped all new speculative development and have halted construction on many spec projects that have recently started. We now expect development starts for the year to range between 500 and 800 million dollars with -a-suits comprising more than 70% of this volume. The cost to complete our active development pipeline is currently 1.6 billion dollars. For acquisitions, dispositions and contributions guidance, while not our expectation, we are simply forecasting no incremental activity other than a few transactions currently under contract. For net deployment uses, we're now projecting 200 million dollars at the midpoint, down 450 million dollars from our prior guidance. The net deployment changes had a minimal impact on earnings, given the timing of that activity. Taking these assumptions into account, we are lowering our 2020 core FFO guidance midpoint by 11 cents. We now expect a range between $3.55 and $3.65 per share, which includes 15 cents of net promote income. We believe we've approached the forecast quite conservatively, with no assumption reasonably made more severe, given what we know today. We have limited role, dramatically reduced employment and a reserve for bad debt and multiples of the GFC. And even with that, -over-year growth at the midpoint, excluding promotes, remains strong at over 10%, all while keeping leverage flat. We continue to maintain significant dividend coverage at one and a half times, and our 2020 guidance implies a payout ratio in the mid 60% range. Longer term, we feel more positive about our business, given the emergence of two new structural demand drivers. First, there will be a need for more inventory of supply chains to emphasize resiliency over efficiency, and second, an acceleration of e-commerce adoption. In closing, 2020 will be a tough year for many. However, despite the uncertainty, Prologis is very well prepared. We enter this unprecedented time with the healthiest fundamentals on record, an extremely well positioned portfolio, a significant in place to market rent spread and a strong balance sheet. And with that, I'll turn it back to the operator for your questions.

Thank you. As a reminder, it is star one on your telephone keypad if you would like to ask a question. If you have additional questions, you may re-enter the queue. Please hold while we compile the Q&A roster. Your first question comes from Jeremy Metz with BMO. Your line is open.

Hey, thanks. Gene, you gave some good high level color here at the start. I was just wondering if you could break it down a little further here in terms of what you're seeing. If you foresee any outside impact from any particular region or city, big box or small box, infill for secondary markets, maybe just a little color, what you're seeing across those channels, what your expectations are. And then as a follow up question outside the same store pool, are your occupancy and debt assumptions similar for the recent portfolios you closed, Liberty in particular?

Okay. Chairman, may have Tom comment on the last question, but in terms of the composition of what's happening on the demand front, I mean, I'll tell you, it's really more industry segment and size segment than any particular geography. Obviously, our Houston operation is facing headwinds from both COVID and plummeting oil prices. So that's our toughest market right now. But otherwise, the industry segments I mentioned are strongest. And clearly in this environment, smaller customers are having a tougher time than larger. And with respect to the... One of the market I'd probably throw in there is Atlanta, which in Atlanta, we actually have a fairly high percentage of smaller customers as well. So Tom, I don't know if you want to take the... Yeah,

Jeremy, from a bad debt perspective, we looked at the portfolio across the entire stack. We looked by industry, customer composition, and we looked at it consistently across the entire portfolio. So we don't see anything unique about any of our recently acquired portfolios.

Your next question comes from Manny Korchman with Citi. Your line is open.

Hey, everyone. Good morning. Might be too early to be asking about 2021, but just given the sort of, yes, slowdown in pace or trajectory in 20, how do we think about your 2021 growth? And how that's going to sort of either slow or maybe rebound quicker, as we said today?

I think our business is going to be somewhat slower before the vaccine and much higher after the vaccine. So you tell me when the vaccine is going to come through, which is a real permanent solution, and I'll tell you how that makes us going to work for the year.

Your next question comes from Jamie Feldman with Bank of America. Your line is open.

Thank you. I was hoping you could focus a little bit more on the smaller tenant discussion. I mean, what have you seen in terms of government stimulus being able to actually help out those tenants? Just maybe some more color in terms of, you know, how bad is it really for small versus large? And what are the, you know, factors you guys are watching to see if they can get help or they're not going to get help or just as much color as you can provide would be great.

So Jamie, let me first make a distinction. Smaller tenants don't necessarily mean smaller companies that occupy those spaces. So you got to distinguish between the mom and pops and smaller locations for, you know, credit worthy companies. So not all small tenants are under pressure. Secondly, the, you know, if you're a contractor or a supplier to residential construction or some kind of an auto related use, for sure your business is down and you're going to be struggling in this environment. Too soon to tell how the government support is going to help, but at least on the levels of support that we've talked about so far, I don't think it fully replaces the revenue and the margins that they've lost during this period. But I can tell you a lot of the demand for their products, it's deferred demand. And if they can make it through this crisis, I think they'll be the beneficiary of this frame back on the other side of this. So tough to tell, the stimulus has been in place for a little less than two weeks. But also the other thing I would say is that there is a ton of monetary stimulus on top of the fiscal stimulus that's come in. So, and the attitude that I see with the banking system this time around, because the banks are, and you guys, by the way, would know better than I would, because you work for a lot of banks, but the banks are oftentimes, well, they're certainly better capitalized. And people seem to be much more cooperative in terms of working with their customers by accommodating them, because everybody realizes that this is not anybody's problem. It's something that happens differently. This is a definite change in attitude with the government, fiscal, monetary, and with the banking system that's distributing the funds. So I think they're gonna work with their customers, including the smaller ones, but some of them, unfortunately, won't make it.

Your next question comes from Vikram Mohatra with Morgan Stanley. Your line is open.

Thanks for asking the question. Two quick ones, really. Just one on the bad debt that you've baked in. Can you just clarify, have you seen any bad debt in the first quarter, and can you talk about the second quarter, and then just second question on market rent growth? You referenced baking in no rent growth. I just wanna clarify, are you referring to market rent growth in 2020, and just give us a little bit more color, maybe by a major region.

Let me

pick

up on the rent growth question, and then I'll pitch it over to Tom for the first part of your question on credit loss. Let me give you the facts on rent growth. Rent growth in January and February were 100 basis points higher than what we had projected for those specific spaces. Rent growth for March, surprisingly, was 200 basis points higher than what we had projected for those spaces. So, so far, we haven't seen evidence of rental decline or deceleration in growth. However, we've assumed that in the forecast that Tom shared with you, because absent, you know, perfect information, you gotta be conservative with respect to rental growth forecast. So, those are two specific data points. The third data point I'll give you is that we have projected certain grants for the two acquired portfolios, IPT and LPT. And in both cases, the spaces that we've rolled over have been on the range of four to 5% higher rents than we had forecast for those portfolios late last year when we underwrote them. Tom, you wanna talk about the credit loss?

Yep, so on that debt experience in the first quarter, we saw write-offs of 25 basis points. And in April, we've seen nothing unusual. As I talked about, our April collections are trending normally, as did March. And as I mentioned, you know, we're conservative here by almost any measure you can look at on the bad debt. And we're reserved appropriately to cover a really severe downside on the AR side.

Your next question comes from Blaine Heck with Wells Fargo. Your line is open.

Great, thanks. So, you guys mentioned that you guys are, excuse me, moving forward with the 30 -to-suits under construction. Are there other -to-suits that might have been in the plan to start construction later this year? And as far as can you talk about the probability of those continuing as planned as well, and whether there are any kind of renegotiations happening on those with respect to the rent side of the equation?

Hey, Blaine, Mike Curliss. Yeah, the 30 -to-suits are well underway. We haven't heard anything from any customers that say differently, so that is a very good sign. And in terms of the prospect list, I would say it's a bit shorter in number, but the people on that list are as active as ever. E-commerce is a big driver of those. You've read a lot about Amazon's activity across the board. We've seen signed leases this year in order of magnitude. We've signed 10 leases this year compared to seven this time last year, and three of those, as Gene mentioned, came in the last several weeks. So, there's a bunch of good signs with respect to the underpinning of e-commerce relative to the -to-suit. There's, I'm not seeing any renegotiations underway, and we have really good opportunities for tailwind here given the lack of spec that you're gonna see in the marketplace. So, I'd say the prospect list is naturally a bit shorter, but pretty robust, and we're optimistic about the -to-suit activity this year.

Your next question comes from Jason Green with Evercore. Your line is open.

Good morning, just a question on bad debt guidance. On the business update call, you mentioned that bad debt could trend as high as 100 basis points, and now guidance incorporates 125 basis points at the midpoint. I know these are similar figures, but just curious if you saw anything in the last few weeks that made that estimate trend higher. No,

just let me clarify. We did not actually guide on bad debt in any way, and we were very careful to draw the distinction between operating performance and any kind of financial guidance. The number that we talked about at 100 basis points on that call is the equivalent of the 90 basis points that Gene talked about. That is the forecast amount of total rent that is gonna be subject to deferral. That is a related, but not the same concept as a write-off, because we fully expect, obviously, the ones that we have deferred to make good on that deferral. Now, a portion of them will probably default, and a portion of the ones that didn't ask for a deferment could default. The 90 basis points of deferral is very different than the 125 basis points on average of credit-wise. The other thing I wanna make sure you understand is that the 125 basis points is applied across the year. Certainly, as you heard from Tom, the first quarter was 20 basis points, and we know what that was. We're carrying another 100 basis points of room from the first quarter into future quarters, and we've got 125 basis points to start with across the whole year. So the amount that we have reserved for anything that could default is significantly higher than what appears on the surface. Let me be even more specific. Not all tenants that are gonna default are gonna default on April 1st. If they default, they're likely to default during the course of the year. So on average, they're gonna default in July, if you just rateably divide it, which means on that basis alone, we're almost three times the actual number covered for default risk and default outcomes. Another way you can get at it is that in the global financial crisis, the total written off debt averaged 56 basis points annually, and the new point this time around is 125 basis points for the remaining, more than 125 basis points for the remaining three quarters, significantly higher. So we've got a scenario multiples of times of the global financial crisis factored in.

Your next question comes from Greg Melman with KeyBank Capital Market. Your line is open.

Hey everyone, just two quick ones here. Just curious, any of the rent referral requests from tenants that paid April, but are worried about being able to pay May, and then just separately, maybe for Chris, you kind of put out 100, or you put out your net absorption figures and construction figures this year. Just as we think about 21, I know you're giving guidance, but do you think the slowdown in deliveries in 21 and the rebound in absorption could result in a better than expected snapback in 21?

I do, I don't know what Chris thinks. But again, snapback is not gonna happen until everybody's got the all clear signal on the health front. And by the way, everybody talks about the government. Everybody talks about the government. When are they gonna put people back to work and open up the country for business and all these demonstrations that we see? That's got nothing to do with it. Even if they open up the place for business, a lot of people will have to go back to work and will, but a lot of people who don't have to go to work won't. So I don't think the government action is gonna be the trigger for that. I think the all clear is gonna have to come from the health front.

Exactly right, and I think, let me just finish up the answer here, which is, to me, it's already given you a view on the demand, but it's also important to remember a view on supply. Right now in the marketplace, we are seeing projects delayed or not started, and that's gonna have a material impact on the outlook for delivery in 2021.

Your next question comes from Tom Catherwood with VTIG. Your line is open.

Excellent, thank you, and good morning, everybody. Tom, you mentioned that customers are focusing on resiliency over efficiency now. How do you see this playing out, and how are you positioning your portfolio and investments or -to-suit activity to assist either with the shift or to take part in the shift?

Hey, Tom, so I think our portfolio's already positioned to capture that activity, number one, just given the proximity of your portfolio to the consumption base, and as we see the acceleration, further acceleration long-term of e-commerce trends, I think we are right there to capture that. And then on the resiliency versus efficiency comment, it's clear customers will carry more inventory to protect themselves against future shocks. We'll see that, and they're gonna want that inventory close to their consumption base, right, to meet consumer demands for delivery times. So I think our portfolio today's positioned, and we're gonna continue to build out our land bank and further solidify our portfolio.

Your next question comes from John Peterson with Jeffreys. Your line is open.

Okay, thanks. I think about six weeks ago, I saw you guys announce a share buyback program. Just curious, given public perception around share buybacks and landlords for that matter, do you think it makes sense to buy back, even if the stock price does fall substantially? And if I could sneak in a second on related question, I'm just curious what social distancing might mean for some of the different industries in your space. Obviously, some users have very few people in the facilities any one time while maybe...

I'm sorry, I think you cut off, but I get the gist of your question. On social distancing, I think there are certain categories of our customers that their businesses will continue to suffer like the people servicing the convention trade and hospitality, I think, or airlines. I think those businesses will continue to suffer. If you mean, what does it mean in terms of the actual occupants of our buildings, the people who work in our buildings, the most people intensive operations that we have are the e-commerce players. And you have read the same things I have about Amazon and other e-commerce players and some of the controversy that's been out there. But I think those companies have been very responsible, actually, in terms of not only providing a lot of employment during this difficult time, but also having a lot of controls in terms of checking people's temperatures. And now I understand they're gonna go to some pretty regular testing, serology testing. So I think they're doing the best they can to actually get people back to business so you and I can actually get our groceries and other things. And I actually commend them for that. With respect to the share buyback program, we did buyback $35 million of stock when the stock got into the 60s. And we felt that that was a very, very significant discount to NAV and it was a compelling opportunity. And to be honest with you, after doing that, I changed my mind and I thought the perception of that is not gonna be great. So we took all the profits that we made there and our intention is to put all those profits back into the ProLogist Foundation. And it was a pretty substantial amount of profits. So I think actually we're gonna do some good with it going forward. But I had to fully thought through the perception of it and but we made some money and we're gonna spend it for a good cause.

Your next question comes from Nick Uliko with Scotia Bank. Your line is open.

Hi, this is Sumit for Nick. Just a quick question on short term leasing and lease terminations actually. So lease terminations while still small have almost doubled as a percent of revenue this quarter versus Q1 last year and versus the last quarter that is Q4 2019. So just trying to understand besides the bad debt and all that, just trying to understand what you're seeing in terms of tenants or markets that are seeing elevated levels of terminations. Any color would be useful?

Yeah, this is Tom, Sumit. On the lease terminations, there's nothing unique. They're episodic. And what we saw in Q1 was not particularly unusual. It was just related to a tenant's needs and we helped them out in another space as well. There were a couple like that. So it's episodic. There's no trending that we see with termination fees being foreshadowing any other type of activity. Well, I just don't see

it. So the only thing I would add to Tom's answer is that it's a billion square foot portfolio. And in our business, unlike the office business, there's not a lot of lease termination fee anyway. So it's one of those things where a very small number could have increased by a large percentage and it's still a very small number. And those things move around by very specific decisions. Keep in mind, we have 15% spread to market and that spread, if anything, is still there and maybe has expanded a little bit. So sometimes the lease terminations are an opportunity for us to make some money on buying the avatars and actually make some more money by releasing the space. So lease terminations are not necessarily bad in our business and they're minuscule in the scale of the portfolio. And I apologize if we don't remember every single one of them. We have over 8,000 leases.

Your next question comes from Keeben Tim with SunTrust. Your line is open.

Thanks, Ann. Good morning. So first question, can you just talk about your risk to, or your exposure to at-risk tenancy or industry? And second, just taking a step back, if I put your comments about rent spreads and market rents being flat, putting it all together, it kind of seems a little bit optimistic given what's going on on the macro front. So what am I missing from your views? Is it really the kind of -by-ten that you're doing, that piece of confidence in that, or something else?

Well, first of all, I don't think I gave you a forecast for market rent. I was very careful to tell you, let me tell you actually what has happened. And I distinguished between the activity in January and February, which was up 1% compared to our expectations versus March, that was up 2%. But our forecasts don't incorporate rents going up. We've basically pushed that out for the balance of this year. And as someone else pointed out, we haven't issued guidance for next year. But we do think there's gonna be a snapback next year that's gonna result in rent growth, if you were gonna ask me right now, it's not a fully-baked idea. So our official view on rent growth is that it's flat for the year, and we're already at some rent growth. So you can think of it as a slight decline or something. But we're not smart enough to be able to forecast those things with precision. The good news is that market rent growth has very little to do with our numbers in the near future. We have only 8% of the space that rolls over, and we have a 15% mark to market, and a greater amount on the ones that roll over this year. So really what drives rent and operating, is the mark to market and the small percentage of rollovers. So I don't think it's gonna be a big deal.

Your next question comes from Eric Frankel with Green Street Advisor. Your line is open.

Thank you. Just two quick questions. Do you have an economic forecast that underlies your operating status this year? And then just regarding kind of the safety stock and inventory resilience team. Have you talked with any customers in specific industries that have brought this up, or is this kind of your assumption just based on your experience or your internal

data? Thank you. Eric, honestly, I'm really surprised with your question. Have we talked to any customers? That just really blows me away. We are very customer-centric. We have a Chief Customer Officer, who in addition, as part of the executive team, who spends all his time in a dedicated team, talking to our major customers. And we have over 500 customers facing people in the field that are in constant dialogue with our customers. So yes, we do speak to our customers quite a bit. As to economic forecast, I don't spend a lot of time looking at economic forecast, because I've seen much smarter people than florelologists have forecasts that are down 5% a year, and some that have down 40% this year. So I don't know what it is. I just look at customer behavior when we forecast our business. And yes, in the long term, our business is completely correlated with consumption, which is highly correlated with economic growth or decline. But in the short term, the dynamics of e-commerce, the -at-home economy, and the need to carry more inventory overwhelm those kinds of longer term considerations.

Your next question comes from Michael Carroll with RBC Capital Markets. Your line is open.

Yeah, thanks. I was hoping you could provide some more color on the rent deferments. The 33 days of average rent that is being deferred on those specific tenants, is that enough for them to survive this type of market turmoil? I'm assuming you've done that type of analysis. And then I guess the second part, what percentage of these smaller tenants qualify for the stimulus package, and does that give you more confidence that you're gonna be able to collect these deferments by the end of the year?

Hey, Mike, I will address that. The second question, yeah, there's a high percentage of our customers that we've been interacting with and that we think will qualify for the stimulus, and we're seeing evidence of that already in the US. We've had several examples where customers initially contacted us only to call us two weeks later and say, hey, look, the stimulus kicked in. So, you know, may be a little bit of a wait and see, but we expect a high percentage of those customers receiving that activity. And then with respect to the 33 days, again, as Hamid mentioned, we know our customers very well. We've had a very thorough process. We've looked at their financials. They filled out the questionnaire, and that's been our best estimate of what's gonna be necessary to bridge them to the next opportunity for them. So that's where we are.

Yeah, and just tying this to the last question, you know, as you heard in our update call, and I think you heard somewhere today, about 20 to 25% of our customer base at some point has had a discussion. With respect to some kind of rent deferral, and of course on those, we've granted a very small portion of it. We expect to ultimately maybe grant 30%, and today's more like 5%. But so that alone means we've had direct discussion with 25% of the customer base. Well, on a billion square foot portfolio, that's 250 million square feet. So we've had conversations, multiple sizes of many, many big companies in the sector with our customers just about that topic during this period of time. So yeah, we're really talking to customers all the time.

Your next question comes from John Dainey with CIFL. Your line is open.

Great, thank you. I might have missed this, and if I did, just tell me, but I don't think you mentioned anything about nearshoring or onshoring as a effect on your business. And then second, Tom, it looks to me like back of the envelope, your midpoint of your guidance is a pretty strong ramp, 85 cents, 87 cents, 89 cents. Can you talk a little bit about how gap accounting plays into your rent deferrals?

Yeah, on the onshoring, so most of the stuff is gonna get onshored from China and possibly from Mexico to the US, at least with respect to the US and with respect to Europe. I don't think that much is gonna change. It's probably gonna be China shifting to European production. And as you know, our Chinese strategy, first of all, it's a very, very small part of our portfolio. It's about .5% of our income is in China. And secondly, it's totally focused towards domestic consumption. We learned very quickly that the export business doesn't generate a lot of industrial demand because containers are the warehouse. So to the extent that there's more onshoring in the consumption markets, the US and Europe, I'm not counting on it, but by definition, that's incremental demand on top of the consumption demand. So it should help on the margin. And the reason we haven't really factored in it is that those are likely to go to really lower cost locations and where real estate is cheap and labor is cheap and we're really well positioned for the infill large urban markets. So likely you're not gonna put a plant to onshore in downtown San Francisco or any place like that or LA. You're gonna go to a cheaper environment. So I think it will be important positive for US and European demand, but I'm not sure we, because of our geographies, are gonna be the biggest beneficiaries of that. I think people who are in more remote locations will probably benefit from that. Tom, you wanna take the other part of the question?

Yeah, hey John, yeah, your other question on the rent deferrals and the accounting analysis of that. So the way we're structuring our rent deferrals is extending the payment term. And as we mentioned, the payment term, we are, the due dates are within 2020. We certainly expect them to be paid, but we will, the whole analysis on the collectability, when you book that revenue, do you deem that revenue to be collectible? And that's the assessment. So this is relating to April revenue that's being deferred. And you make the assessment in April as to the collectability of that revenue, and you either book that revenue or you book a reserve or a portion of reserve against it based on your assessment of collectability. And then regarding the ramping of, or what is our earnings look like from a quarterly perspective, clearly Q2 will be heavily influenced by the promote, because that's when the bulk of that will land. And then it's really a function of what we see, quite frankly, from a bad debt experience. As we said, we've got a lot of bad debt reserve that's sitting there for the rest of the year. And I think our results are gonna move relative to what happens there.

Hey, the only thing that I would add, John, to that is that our prior to these adjustments and these downward adjustments, our year over year growth was on the order of, I think 13, 14% FFO growth, 14% FFO growth, actually. And that's a big number, right? So it's come down 4%. So maybe another way of asking your question is how come your guidance previously was so high and still is high? And the reason for that is primarily that the volume of development starts in prior years that we're just having a capitalized interest in them are now coming on, and there are a lot of bill pursuits in those, and those are now fully income producing. So we had them in the denominator as capital expenditures, where we weren't earning a whole lot on them. And as they stabilize and their lease, those extra earnings are coming online. So it had nothing to do with this changed environment. It was just high to start with because of that and remains pretty healthy. I think 10% growth year over year, even in the strongest environments without increasing leverage.

Your next question comes from Dave Rogers with Baird. Your line is open.

Good evening for Tom and Ami, just about asset values. I know, Tom, you talked about the promote, being consistent in the guidance and the reason why is the pricing at the end of the first quarter. I guess I just wanted to drill on that if I could and the idea that you guys have taken market rents to more of a neutral stance this year, you've taken market vacancy outlook higher. I guess maybe why wouldn't that impact the valuation of assets as you sit here in a very point in time? And is there any risk to that promote? And then maybe just a follow up to that. Gene, you said something earlier that the number of leases that you were doing, I think was flat on a portfolio size adjusted basis. Did you give the square footage for those and are they smaller deals in the pipeline or larger ones, any color there would be helpful as well. Thank you.

Yeah, on the appraisals, what we've seen in the first quarter appraisals is that generally the numbers are up very slightly but the appraiser is like one or 2% quarterly and appraisers have basically stickered the appraisals as they normally do in markets with turmoil that talk about that there are no comps, et cetera, et cetera. But the real answer on that is that because promotes are such a sensitive calculation to the terminal value, these are generally three year promotes and if you move around the terminal value a little bit, the promotes can move around. We're generally very conservative in projecting and guiding promotes and we feel like we've got sufficient room to absorb any kind of a downside there. The other thing I would say is that more than half of the projected promote is a hold back of the promote from three years ago and the amount of which was determined and calculated and is known and that number will not change. So a big portion of that number, we know exactly what it is, more than 50%. So to the extent there is variability is on that last, I would say 40% of it, 60% of it is fake.

Here next. Yeah, let me just answer the second part of the question which is the experience in the last 30 days of leasing. We have seen more leasing in the bigger size segments and we'll be happy to quantify that for you later on. But definitely in big customers.

Here our next question comes from Derek Johnson with Deutsche Bank. Your line is open.

Hi, hi everyone. You've covered a lot so let's do this. So PLB has grown rapidly and I will say accretively over the past few years and in 2019 had additional large acquisitions. Meanwhile, investor sentiment has so far remained positive on industrial rates. However, amid this serious pause and probable pen and shakeout, what is it about the larger portfolio and positioning which makes you most optimistic in these uncertain times?

Well we've had half of experience on the two latest acquisitions and Tom, last time we talked about this a couple of days ago, we were up about 5% on our underwriting of those portfolios. Based on activity that's already taken place. So we feel really good about it. Oh sure, you know, Houston energy is worse than we thought and Liberty had a pretty significant presence in Houston and we did too. But again, it's a billions growth of portfolio. And on the other hand, Pennsylvania has done a lot better than we thought previously because a lot of the New York adjacent demand and the big boxes have for some strange reason, you know, taken up a lot of space in Pennsylvania. So that's looking better and that's actually a bigger portfolio. So Net Net, all the reasons for which we did those investments that we articulated before stand. And on top of that, they've just performed better than we expected. So that's a really good start. I don't know whether that will continue for the next 10 years, but it's better to be 5% ahead of the game than behind the game when you're getting off the blocks. With that answered question, let's give him an opportunity to ask it again because it was a complicated question. So if we didn't answer it, ask it again.

Your next question comes from Manny Corchman with Citi. Your line is open.

Hey, it's Michael Billerman here with Manny. I was wondering if you can address a little bit on the change that's changed and looking at the press release, you've brought down your acquisition volumes, both building as well as land by a billion and a quarter and commensurately you've brought down your disposition volumes as well and you've obviously made a big cut to the development side in terms of starts, which obviously have capital commitments in the future. And I want to know two things. One, why not take advantage of the marketplace and continue to sell and build liquidity and continue to reshape the portfolio, which you've done over the number of years to improve its quality and location. So why not sell more? And then the second part is on the development side where you've taken a much more conservative approach and ramped down your development. What are you seeing from the industry at large in terms of development? So two separate sort of topics, somewhat connected, if you can address that, that would be great.

Great, Michael. We are chickens and chickens live longer. I mean, when the world is falling off the cliff and everybody's talking about, you know, GDP going down 40% this quarter or whatever, we have some spec developments. We can start them anytime. They're entitled, you know, they're ready to go. And if we see the demand, we'll start them two months later. We're not saying that that's our forecast. We're saying every quarter, we've got to get in front of you guys and give you some assessment of what we think is going to happen. And this is a very turbulent time. I think the fact that we've even put out a guidance, and by the way, we don't have an advantage of looking at all the other people and figuring out what they're doing to sort of tailor our message accordingly. We're going first and we got to stick our neck out. And we have, and we've given a range, but we have taken a conservative approach saying that we're not going to deploy any new capital on discretionary starts of speculative projects, and we're not going to buy anything at yesterday's prices. If prices become different, for sure we're going to use our resources. We have over 10, $11 billion of capacity between the funds and the balance sheet. And we will certainly start those developments once there is leasing that we feel really comfortable about going forward. But we can't predict that. There's no cost to waiting. There's only upside in waiting. So we've covered the downside. We're still well positioned for the upside. And it's not intended to be a forecast. It's just a prudent thing to do. And I hope we are wrong about that, and we'll do closer to what we had planned on doing before, but we're not going to get over our skis.

Your next question comes from Jamie Feldman with Bank of America. Your line is open.

Great, thank you. I guess I'm along the same lines. A quick follow-up and then a question. One is if you could just talk about when you see occupancy bottoming in the portfolio. I know you guys said kind of towards year end, things improve, but I'm curious, more detailed, you know, how you see things, you know, what the trajectory is for occupancy. And then bigger picture, you know, as you think about, you know, potential growth, potential cracks, obviously there's a lot of cracks, but, you know, are you seeing distress among competitors or just, you know, versus prior downturns that you've seen? Where do you think, you know, where's the most risk that maybe people aren't thinking about?

Yeah, I think we will get a significant increase in occupancy the quarter or the quarter after the vaccine is widely available. Maybe even when it's announced, then it's definite that it's coming based on the anticipation of it coming. So you tell me again, debate, and I'll tell you when that will be. From everything I hear, it's gonna be more like next summer-ish, although there's some really positive developments that I've been hearing about from the scientific community. I mean, we've got a couple of really big medical centers here and I'm

in

constant dialogue with them. On the therapeutic side, there's some really good stuff happening that we may even hear about in the August, September timeframe. So I think that's when the occupancies will turn around. In terms of the cracks, I would say, as I guess Warren Buffett says, we'll find out who's been swimming naked as the tide recedes. There are some people that have been, mostly on the private side, by the way, I'm pretty proud of my public brethren. My enlarged have really behaved well throughout the cycle and I think everybody's kind of pretty disciplined in the sector, but there are a couple of private players, particularly in parts of Europe, Central and Eastern Europe being a good example, that have really gotten out there on their skis and we'll see what happens. Maybe they're really good skiers, but I would say of all the cycles I've seen, whether it's the 87 collapse or the SNL crisis or the dot com or the GFC, I would say there's less of that around, much less of that around than any one of those cycles. I think we are over our time allotment and we've taken way too much of your time this quarter with two calls, so let me thank you for your interest in the company and invite you to our next quarterly program and hopefully we'll all be much more optimistic than we are in this environment and everyone stay healthy, take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, you may now disconnect.