Prologis, Inc.

Welcome to the Prologis Q2 earnings conference call. My name is Jason 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. To ask a question at that time, please press star, then one on your telephone keypad. To remove yourself from the queue, 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, Jason, and good morning, everyone. Welcome to our second quarter 2020 earnings conference call. The supplemental document is available on our website at prologis.com under investor relations. I'd like to state that this conference call will contain forward-looking statements under federal securities laws. These statements are based on current expectations, estimates and projections about the market, and the industry in which Prologis operates, as well as management's beliefs and assumptions. Forward-looking statements are not guaranteed of 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 second quarter results press release and supplemental do contain financial measures such as FFO and EBITDA that are non-GAAP measures. And in accordance with Reg G, we have provided a reconciliation to those measures. This morning, we'll hear from Tom Olinger, our CFO, who will cover results, real-time market conditions and guidance. Hamid Moghadam, Gary Anderson, Chris Katen, Mike Kurliss, Ed Necretz, Jean Riley, and Colleen McEwen are also with us today. With that, I'll turn the call over to Tom, and Tom, will you please begin?

Thanks, Tracy, and thanks everyone for joining us today. We hope you and yours are all well. The second quarter played out better than our expectations in terms of both our results for the period and outlook for 2020 and beyond. Leasing activity in our portfolio, market fundamentals, valuations, and rent collections are all trending favorably. Starting with results, Core FFO for the second quarter was $1.11 a share, which included 23 cents of net promote income. Core FFO excluding promotes came in above our forecast due to higher NOI and higher strategic capital revenues. The increase in NOI was driven by lower bad debt and higher occupancy. For comparison, the quarterly results were in line with our initial 2020 guidance that we provided back in January. Overall, rent collection trends are excellent, and as of yesterday, we've collected 98% and .1% of June. We've seen the pace of rent receipts accelerate. Each month since March with collections ahead of 2019 levels for each month as well. As a result, our bad debt provision for the second quarter was 58 basis points of rental revenues versus our forecast of 160 basis points. Our share of cash seems to run a wide growth was 2.9%, which included a 42 basis point negative impact from bad debt. Turning to leasing and customer activity, segments benefiting...

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Activities則Christian

Thank you.

Good economy, remain very strong and continue to represent about 60% of our customer base. Leasing in the quarter by industry was well diversified, including from non-essential industries. E-commerce normalized to 24% of new leases. You'll recall from the first quarter that number was 40% in the early days of COVID. Negatively impacted segments include restaurants, hospitality, oil and gas, and conventions. These segments represent just .7% of our annual rent. Over the last 30 days in our operating portfolio, we've signed leases amounting to 16.3 million square feet, up 24% year over year. Lease proposals have risen 21% year over year, and lease gestation has declined by 14 days to 44 days. Market fundamentals were stronger than we expected in the quarter, and we are now forecasting the following for the US in 2020. Completions to total 250 million square feet, a 4% year over year decline. Net absorption to total 160 million square feet, a 60% increase from our April view, but down 40% year over year, and year-end vacancy of 5%. Our forecast for year-end vacancy rates in Europe and Japan have also improved, now at .5% and 2% respectively. Strong leasing activity in the quarter has moved the following markets off of our watch list. Central PA, Phoenix Bulk, Atlanta Bulk, and Guadalajara. Our watch list includes Houston, West China, Spain, and Poland, which moved back into the list this quarter due to extremely undisciplined spec development by one private developer in that country. For strategic capital, the promote for USLF came in above our guidance as Q2 valuations were higher than our forecast. Investor demand for our private funds remains very strong. Year to date, we've raised more than $2.2 billion of equity, approximately 17% ahead of our pace in 2019, which was a record year. Our open-ended funds currently have equity cues totaling $1.8 billion, with an incremental $1.4 billion in due diligence. In Q2, a $448 million secondary trade in our health fund was made with nine investors at a slight premium to NAV, and $421 million will be redeemed in our USLF fund in July. Post these transactions, redemption cues for our open-ended funds will total just $10 million. Looking to the balance sheet, we continue to maintain exceptional financial strength with liquidity of $4.6 billion and combined leverage capacity between Prologis and our open-ended vehicles at levels in line with ratings, totaling over $13 billion. Turning to guidance for 2020, our outlook has improved from last quarter given what we see in our proprietary data, our customer dialogue, and the pace of rent collections. While there may be some headwinds in the back half of the year related to the timing and nature of economies reopening, we believe that our revised guidance range has taken those factors into account. Here are the key components of our guidance on an open-ended share basis. We are raising the midpoint by 50 basis points and narrowing the range of our cash same store guidance to between 2.5 and 3.5%. This assumes a reduction of bad debt by 50 basis points with a range between 60 and 90 basis points of gross revenues. This means at the midpoint, we're forecasting to reserve about 110 basis points of bad debt in the second half of year. Today, we've granted rent deferrals of 48 basis points of annual rental revenues and continue to expect that grants for the full year will be less than 90 basis points. We are increasing our expected average occupancy midpoint by 25 basis points and narrowing the range to between 95 and 95.5%. Occupancy will slip slightly in the second half, though not as much as we guided to in April and end of year at a very healthy level. Globally, debt effective rents declined by .4% in the quarter as a result of higher concessions, essentially giving back the growth from the first quarter. Looking forward, we expect rents to be roughly flat for the back half of the year. Our in-place to market rent spread now stands at 13% and represents future growth potential of over $450 million of annual NOI. We expect rent change on rollovers to be more than 20% in the second half of the year. For strategic capital, we expect revenue excluding promotes to increase by $15 million relative to our prior guidance and now range between $360 and $370 million. We're increasing our net promote income from the full year to 20 cents per share and we do not expect to earn any material promote revenue in the back half of the year. As a reminder, there will be a timing mismatch in the second half of the year as we will recognize promote expenses of about three cents per share. We are forecasting a GNA range of $265 to $275 million down $5 million from our prior forecast. Our outlook for capital deployment has improved significantly since April and we now expect to start $100 million of new specs in the second half. Our revised starts range is $800 million to $1.2 billion for the full year with -to-suits comprising 65% of this volume. In addition to this range, we plan to resume construction on $150 million of projects that were previously suspended. We are currently negotiating leases on roughly 40% of the TEI of these suspended projects. At the midpoint, we're increasing acquisitions by $100 million, contributions by $150 million, and dispositions by $400 million. We're now projecting net use as a capital to be $100 million at the midpoint. Taking these assumptions into account, we're increasing our 2020 core FFO midpoint by 12.5 cents and narrowing the range to $3.70 to $3.75 per share, including 20 cents of net promote income. This compares to our original guidance midpoint at the beginning of the year of $3.71 a share. -over-year growth at the midpoint excluding promotes the sector leading at over .5% while keeping leverage flat. Our three-year CAGR has been .5% outperforming the other logistics reads by more than 500 basis points annually. We continue to maintain significant dividend coverage of 1.6 times, and our 2020 guidance implies a payout ratio in the mid 60% range and free cash flow after dividends of $1 billion. Looking forward, the long-term growth outlook of our business has strengthened. Our investments in data and technology provide us with the tools to identify pockets of risk and opportunity within our markets and portfolio, a significant competitive advantage. I want to I want to repeat our results for the quarter. Core FFO for the second quarter was $1.11 a share, which included 23 cents of promote income. Core FFO excluding promotes came in above our forecast due to higher NOI and higher strategic capital revenues. The increase in NOI was driven by lower bad debt and higher occupancy. For comparison, the quarter results were in line with our initial guidance that we provided back in January. Overall, rent collection trends are excellent, and as of yesterday, we have collected 98% and .1% of our June and July rents, respectively. We have seen the pace of rent receipts accelerate each month since March, with collections ahead of 2019 levels for each month as well. As a result, our bad debt provision for the second quarter was 58 basis points of rental revenues versus our forecast of 160 basis points. Our share of cash seems to run a wide growth was 2.9%, which included a 42 basis point negative impact from bad debt. Turning to leasing and customer activity, segments benefiting from COVID economy remain very strong and continue to represent about 60% of our customer base. Leasing in the quarter by industry was well diversified, including from non-essential industries. E-commerce normalized the 24% of new leases. You'll recall from the first quarter, that number was 40% in the early days of COVID. So with that, I'll turn it over to Jason for your questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steve Sackler from Evercore ISI. Your line is open.

Thanks. Good morning, Tom. Thanks for repeating some of that. I just wanted to circle back on just kind of the leasing activity. I know in the supplemental, you guys provide leases commenced and not leases actually signed in the quarter. You did provide a little bit about the leasing activity in the last 30 days, but could you maybe just help put the actual leasing activity in perspective in Q2? How much of that was impacted and how did that maybe change month to month to get to that 16 million square foot number for the last 30 days? And then could you just also comment on the drop in occupancy in Asia? Thanks.

Okay, I'll start with that. So from a leasing perspective, we certainly saw leasing activity pick up materially in June. June was a very high month. And as I mentioned in the last 30 days, we've certainly seen our leasing accelerate as it relates to occupancy in Asia. It's related primarily to China and small spaces under 100,000 square feet.

Your next question. My apologies. Go ahead.

Next question, please.

Okay. Your next question comes from the line of Craig Mailman from KeyBank Capital Market. Your line is open.

Hey guys. Just a quick question on kind of what activity you're seeing big box for a small box. I know there was some concern earlier or post COVID. Just curious. Yeah, I know you guys took Phoenix and Atlanta big bulk off. I mean, are you guys seeing better activity across the board or is it still kind of primarily in some of the bigger spaces?

Yeah, this is Gene. I'll take that one. We are certainly seeing better activity with bigger spaces and that is what has led to taking those markets off the list. And conversely, small spaces have struggled. We've seen more softness in this category and these are segments that we're focused on. But having said that, our property quality is excellent in those segments and we'll expect recovery. But right now, you certainly see better activity in the bulk spaces.

Next question, please. Your

next question comes from the line of Kib and Kim from SunTrust. Your line is open.

So a couple of questions. The higher leasing proposals that you've seen over the past 30 days, I think you said 21% higher. I'm just trying to get a sense of is that mostly renewal activity or expansionary space? And second question, when you mentioned all the positive leasing stats and you obviously increase your guidance for -sign-OI and those are still activity. But if there are one or two things that you really looked at to give you confidence that midway through the year to increase guidance,

how

much of it was based on customer feedback and the confidence your corporate customers are seeing versus hard metrics like leasing stats?

Yes, let me start by answering that question. Obviously, we're having some difficulties here with our conference operator. Yeah, the activity accelerated, obviously, in the month of June and it's pretty broad-based. And I think for the best indication of that, you can look at our -to-suit volume because it's up substantially in terms of percentage and absolute amount. And that tells you something about the scarcity of space out there because that's what people have to turn to to get their space needs met. So, Mike, do you want to elaborate on that somewhat?

Yeah, we're seeing broad-based activity, everybody. If you believed all the hype you saw there, you would think it's all Amazon. Amazon clearly is ramping up their activity, but we're seeing definite broad-based activity across a lot of sectors. Home improvements picked up, appliance business is strong, and actually seeing quite a bit of activity from the food crowd on our -to-suit list. The thing you've got to remember is there's been plenty of structural rollouts that were announced and well underway pre-COVID, and so it's not just Amazon. They're a big part of it, but look for a lot of broad-based demand and keep that -to-suit list strong.

Your next question comes from the line of Nick Ulico from Scotiabank. Your line is open.

Hi, this is Sumit here for Nick. Just a quick question, actually, following up on that -to-suit. So, you know, there was, I think, 100% of the pipeline this quarter was a -to-suit with a 48% margin. What's so special about these developments that they're so creative to the margin and there's such a wide spread between the development cap rate and the stabilized sort of market cap rate that one would anticipate? And secondly, as a follow-up, just thinking about promotes, I know that fourth quarter has something coming up from Brazil, a core fund in Europe, and the USLV. So what's driving the lower expectations on promoting confidence?

Sumit, this is Mike. I'll hit the first one on the higher than normal -to-suit margins. You're looking at a small sample that's set there, a couple deals there that were more of the parking lot, least parking lot flavor, and those tend to be very well located, have relatively low incremental investments paired up with strong rents. Therefore, you see really strong margins, but I would look for those margins to blend in well over the year normalized to the overall -to-suit body of work in the mid-20s. Tom, you want to hit the other one?

Yep, Sumit, on your second question on promotes, in the second half it's going to be lower, really small, because the promotes are effectively just based on development. There's very little AUM in those funds that is promote eligible in the second half. And remember, we've got three cents of promote expenses that will also will be incurring in the second half of the year.

Your next question comes from a line of Derek Johnston from Deutsche Bank. Your line is open.

Hi everybody, thank you. Has COVID induced e-commerce acceleration pulled demand forward in your view? And secondly, where are we in this shifting secular landscape? Does it feel like we're mid to early late innings? Just would love your take. Thanks.

Yeah, I think this is more like the Borg-McEnroe match back in the late 70s. We don't know how many innings are in this game. We keep going into overtime. And I think we're very early in the rollout of e-commerce. You know, e-commerce started the year in the low teens in the US. The numbers vary in different places. And there's no telling how far we're going in the next year. It can go if it goes to 20, 25%, which is where it was at the beginning, early stages of COVID, or stabilizes higher than that. This could be very, very early in the e-commerce rollout. And, you know, initially, obviously, we've had a clear market leader, which is Amazon in excess of 40% of the total volume, but we're seeing breadth in terms of e-tailers that are now growing their businesses and have founded their footing. So I think we're in very early stages. And as you know, e-commerce has a sort of a supercharged effect on logistics.

Your next question comes from the line of Manny Korshman from Citigroup. Your line is open.

Hi, everyone. You know, there's been, I guess, a rebounding concern in supply coming up. So two questions related to that. One, what are you seeing in terms of conversion of use, whether that be retail properties or maybe even office properties and some anecdotal stuff that we've seen? And secondly, are all developers being at this point of view and trying to keep their -to-suit volumes high and their spec volumes low? Or are we running the risk that we're going to see a lot more spec, not from prologists, but from your competitors or peers?

Yeah, let me take the second part of that first. The places that we see undisciplined development are few. Poland is clearly one. And I would say Houston is seeing more building than it should. I mean, there's more product coming online in Houston than the demand warrants. But generally, I would not say there's an overbuilding problem or anywhere near it. And if you look at the numbers that I think Tom talked about at 250 million square feet, that's about the normal run rate for construction. And it's actually a little bit down from our forecast at the beginning of the year. So I think this year, demand will fall short of that level of construction. But it's not because supply is excessive. It's because demand temporarily will take a dip. And in my view, will accelerate as we come out of this thing because of the growing percentage of e-commerce and also the need to carry more inventories. With respect to the first part of your question, could you ask that again? Because I'm kind of a little unclear about it. Oh, conversions, conversions. Look, there's a lot of talk about it. And I think in time, you will see conversion, particularly of retail. But there are obstacles. And we should talk about those obstacles. Number one, a box in the middle of a shopping center is subject to all kinds of reciprocal easement agreements. And it's not really easy to go back and just redevelop one box. Obviously, those boxes are in the right locations because they're in the middle of dense populations and high levels of income. So the locations are good. But there are internal dynamics that make it difficult to do that. So you have to respect the REAs and all the other arrangements. Also, zoning is an issue because you need to convert from retail to industrial zoning. And that takes longer than you can imagine because neighborhoods don't want trucks and traffic there. And finally, there's an economic issue where these retail boxes are in somebody's books for several hundred dollars a square foot. And you need a number much lower than that to make sense for logistics because you need to also spend money to convert them to logistics use. It's not as if they're set up that way. So I think in time, you'll see more and more of this kind of development, but it's not a surge. And I think we're involved in a number of them. But it's tougher and it takes longer than you can imagine. The stuff that you hear about hotel rooms or offices being temporarily used for logistics, we've seen that before during holiday season when things get really crazy. But those are really for last touch distribution purposes. They're not really permanent space because economically they're not viable for long-term logistics use.

Your next question comes from the line of Vikram Mahoultra from Morgan Stanley. Your line is open.

Thanks for taking the questions. Just two questions. One, could you give a bit more color on how market rent growth may have trended over the last few months, particularly in the US versus global? And then second, if you can give a little bit more color on utilization of the cost of capital that you now have, which there may have been questions a few months ago, but today it's pretty robust. I'm just wondering, can you give a little bit more color between utilizing that for development acquisitions and maybe even M&A?

Yeah, thank you, Vikram. So two questions. With respect to market rents in the US, I think the best way to think about them is that we are basically on the same track we were before, but with a pause and interruption. In other words, I would say in this era of COVID, the growth hasn't continued. I believe it will flatten for the balance of this year, just like guidance suggests, and then we'll pick up on a path of growth. And the reason I believe that is because there's never been a cycle where growing into it or going into it, we've had high occupancy, vacancy being under 5%, and also very high utilization rate in the mid-80s. And there's no sign that those numbers are in any way deteriorating. So I think the market continues to be strong, and I think we'll be back on a trajectory of rental growth, not too dissimilar from what we were projecting at the beginning of the year. With respect to use of capital, I continue to believe that there is relatively little differentiation between different companies. So M&A is usually pretty tough. I mean, we've done it successfully in a couple of instances, but increasingly, the targets are less and less compatible with our portfolio in terms of quality. And also, the companies are trading right on top of each other in terms of multiples. Don't ask me to explain that because the growth rates have at least historically been substantially different. But I don't make the market. I react to it. The place that is always the best use of capital for us is building out our land bank because we already have the land and the incremental returns on capital are the most attractive, particularly with the kind of margins that we were talking about earlier. And Mike referred to now that's pretty disciplined business. You can't do an infinite amount of that kind of development, but that's the first place we would go to. On just strength acquisition of assets, look, just like I said last quarter, I don't think pricing of logistics real estate is going to soften. In fact, I think cap rates are going to compress because there's a lot of capital that's placed to go into real estate, and obviously there's sectors that are not going to attract fair share capital like they did before. So that capital is piling in the few sectors that are performing well. So I think the best use of capital is building out our land bank.

Your next question comes from the line of John Kim from BMO Capital Markets. Your line is open.

Thank you. You talked about leasing volume being healthy. It sounds like it's picking up, but you also discussed a dip in occupancy in the second half of the year. Is this an indication that you're looking to push rents over occupancy? Is it greater downtime from back debt expense, or are there other factors that contribute to this?

Yeah, John and Steen, I'll take that one. I wouldn't draw a conclusion from the next two quarters forecast on our optimism about the demand. Demand's been good, as we mentioned at the outset and have. About 60% of our portfolio customers are expanding, but some are shrinking. So it's a balanced view for the rest of the year. And the reality is that until we come out of COVID and we see economies reopening, we won't have complete clarity. So I would actually point to later in the year 2021, we're going to come out of this. And I think as Amid said a few moments ago, I think you'll see a continuation of the rent growth. But until there's clarity on reopening, there has to be a, you have to have a balanced view.

Okay. Yeah. And the only other thing I would add to that is that beginning of the year, we're forecasting essentially 260 million feet of demand and supply. And now we're projecting 250 million feet of demand and sorry, supply and 160 million square feet of demand, which is down from our original forecast. So if you forecast 90 million square feet of demand, obviously you have to go along with it, a pause in rental growth. So that sort of outlook is consistent both between demand and the rental picture that goes along with it. But when we come out of this thing, I think for reasons we've described before, mainly an increase in inventory generally 5 to 10%. And also the stabilizing share of e-commerce at the higher level than before will actually lead to a surge in demand, which will make up in my view, more than the 90 million feet we lost or we projected to lose this year. But nobody knows. I mean, these are all our best guesstimates.

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

Great. Thank you. Good quarter, guys. First of all, hoping you could update us on how IPT and LPT are doing versus underwriting. But then also we're curious with both those transactions, it greatly increased your exposure to the US. How are you thinking right now considering international markets seem to be getting back on their feet quicker than the US on exposure to the US versus exposure to international markets?

Yeah, international is a big spectrum. And on one side of it, you have places like Poland, which is suffering from overbuilding. You have Spain, which is weak in demand. And then you have places on the other end of the spectrum that you would never get. Tokyo is under 1% vacancy. Osaka, where the vacancy was in the teens, is now in the 5% range. And we're releasing up pretty much everything we're building ahead of schedule. So obviously there's a wide variety overseas. But if you sort of throw all of the overseas markets together, I would say generally they're a tad slower than the US, but not materially so. And Gene may have more granular comments than but the very consistent actually in terms of market strength.

Yeah, and you asked John about underwriting. And we're actually a little bit ahead of underwriting on both of those portfolios, even through what we've seen in the last few months. And we'll revisit that at the end of the year. But things are looking good. Obviously for liberty, the Houston exposure is going to be challenging for a bit. But on the other hand, Pennsylvania portfolio, which is the biggest piece of it, has actually done quite well, leading us, by the way, to bring central Pennsylvania off the watch list. So we're a little bit ahead of plan so far.

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

Great. Thank you. I was hoping to get your thoughts on two points. Number one is I know you mentioned what the this year's development pipeline looks like or deliveries look like. Can you give some color on what things look like heading into 21, given that there was this pull back and starts? And then also just, you know, given that you did increase guidance, just thinking about the lingering risks ahead, whether it's the election, PPP, subsidies burning off, cases rising in other markets, like what gave you comfort to get more positive here, even though there are some things lingering out there?

Customer behavior in short. Jamie, Gene's going to give you the real answer. But the short answer is customer behavior. We don't make the market. We just observe what happens on a real time basis. But Gene, go ahead and talk about the details.

Yeah, I mean, specifically, Jamie, we're adding sort of a net of 250 million of spec to the plan. We're still way below the January forecast. And those are like 15 projects and 15 different markets. So there are bets that are being placed based on the customer demand in those markets. And I wouldn't be surprised if that number increases. You also asked about what happens going into 2021. I think we'll wait, you know, wait to see what happens before we talk about 2021. But we obviously have a much more confident view on building spec today than we did in April.

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

Yeah, good morning out there. Just was thinking about your portfolio as you've moved more in fill with respect to maybe service oriented customers versus distribution oriented customers. I wanted to kind of think about how those conversations are going with those customers. And are you guys still targeting rents from the end of the year? And they're accepting that? Is there a big differential between what they're anticipating? And what are the expectations of rents and what you are? So that's the first question. The second is just for cap rate compression and the do we need to get past the point of increasing vacancies? Do we need to see rents grow again before we see that materially happen? Or is the debt side of the equation enough to make that happen? Thank you.

Dave, let me just start and Jim will give you more details. On cap rate compression, we're already seeing it particularly in Europe. And there's plenty of transaction evidence that those cap rates are holding and in some cases declining. And by the way, that's generally with our valuations that have been held flat. And remember, valuations are backwards looking. I mean, if they were, if they had the evidence of the last month of transactions, I think those values would be up. With respect to distribution space, as we've said many times, Port Likus operates in all four categories of space, whether it's last touch, all the way to gateway cities, the larger spaces in major markets. And that distribution is pretty balanced. And in fact, we have a paper out there that's not too out of date, that shows exactly what our position is in each category. So, we haven't really materially changed our allocation to different markets. It's just that we get more questions about the last touch markets these days than we did before. You know, the old A&B strategy was very much large markets and info locations. So, that's where that portion of the portfolio generally is coming from, which is getting a lot of attention these days. James, do you want to elaborate on that?

Yeah, the only thing I'd add is you asked specifically about rent growth in info locations. And to date, we have certainly seen much more, much higher rent growth in these locations. And as you can imagine, there's a bit of, you know, market pricing discovery going on, because these are sub markets that generally are immature for this kind of use. And the product types basically span a huge range. But, you know, so far those, the growth in rents have actually surprised us to the upside.

One other thought that I'll just throw in there, you've heard us talk about this many times, but logistics rents are only two to five percent, call it, to give it a wide range of total logistic costs and the rest being made by labor and transportation. So really, the ability to pay for the customer is not the issue. Because even if they pay 20% more rent on an item that's, you know, 4% of their total logistics costs, that's 80 basis points more in So that's not what drives it. What drives really rental growth is how anxious is your best next competitor in terms of dropping out rents. That's what determines it, not the customer's ability to pay rent. And generally speaking, when you're operating at around 5% vacancy, which is where we are, there aren't that many competing spaces around. So we continue to have pricing power generally in most markets. Obviously the Houston's of the world are different.

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

Great, thanks. Good morning out there. So just a couple questions here on rent collections in same store. Tom, I think you gave rent collection figures for June that might be excluding deferred rents. If that's the case, can you give us the June and second quarter collection numbers based on the cash that's come in relative to kind of your pre-COVID billing expectations? And then secondly, you know, you guys have reported strong rent collection results relative to a lot of reits out there. But it just seems to me like the amount of uncollected cash rent is still a pretty tangible headwind. And for you guys to still post 3% cash same store in the face of that headwind is very impressive, frankly. So maybe you can reconcile how cash same store can be .9% with, you know, even a few percentage points of uncollected cash rents. That'd be really helpful.

Okay, Blaine. So on the rent collection, as I'll restate, so in June we collected 98%. In July we collected 92.1%. We deferred about 195 basis points of rent in June and about 70 basis points of rent in July. So that rent's not due, so it's not in those numbers, of those collections numbers. Now, our collections, as I stated, are doing extremely well. We're ahead of last year since March. Every month we're ahead of schedule. Now, we believe we are going to collect all the cash with the exception of what we think we've covered in our bad debt reserve. So we've assessed, we've gone through, we've assessed industries, we've assessed space sizes, we've looked at all the different metrics, we've looked at individual customers across our portfolio, and we feel really good about that bad debt range of 69.90 basis points. Now it's lower than we had projected in April, for sure, meaningfully lower, but it's because of the collections are so strong. I would anchor back also to the fact that our bad debt history on average is about 20 basis points. We can go back 14, 15 years. We've averaged 20 basis points of bad debt. Now our high was 56 basis points in the GFC, and that's kind of what we saw here in Q2. So I think we've got the second half bad debt adequately covered in the range, probably, and then some, and I feel good about getting the rest of this cash in the door.

Your next question comes from the line of Michael Carroll from RBC. Your line is open.

Yeah, thanks. Gene, I wanted to dig in a bit to the individual market trends that you highlighted. Can you provide some color in what drove the improvement in central PAs to just better demand, and then also with the issues that you're seeing in Houston, is that simply just supply in a weak energy market and our developers slowing down construction activities, so just going to take time to absorb that space, or are there these longer-term issues that we have to deal with?

Yeah, so in Pennsylvania, it's all leasing. So the improvement is related to leasing. In Houston, you have obviously two headwinds on demand. You've got energy pricing as well as COVID, and you have a huge amount of construction in progress at the beginning of this year. Now, some of that was suspended, but frankly, the vast majority was not. So you're going to have an overhang of space in Houston easily going into next year sometime, because there's just so much supply. In terms of developers being disciplined or not, I think, frankly, the jury's out on that. Right now, things appear to be disciplined, but I would have hoped, frankly, that we would have seen more projects stopped. We didn't see that. So I think we need to monitor that aspect of it, but unfortunately, in Houston, you have a supply issue as well as a demand issue.

Your next question comes from the line of Eric Frankel from Green Street Advisors. Your line is open.

Thank you. Just to talk about e-commerce again, obviously, Amazon's been quite active, and Mike, you commented on some of the longer, long-standing supply chain reconfiguration efforts by home improvement companies, appliance companies, food and beverage. Could you talk about how some of the big-box retailers are adjusting to, because they obviously had a huge surge in e-commerce sales. I'm just curious if they've adjusted there or they're looking to adjust their warehouse footprints at all.

Yep. Eric, thank you. We're seeing activity from those retailers, not at the pace we're seeing from the traditional e-commerce, but we certainly have on our prospect list some household names that you would consider in the retail business that are looking to shift from brick and mortar and to make more warehouse to consumer shipments. We're definitely seeing an uptick in that segment.

Yeah, home improvement and grocery sectors are particularly strong.

Your next question comes from the line of Tom Catherwood from BTIG. Your line is open.

Thank you, and good morning. I just wanted to actually follow on Eric's question about retail, specifically from the bricks and mortar side. Since 2011, obviously you've reduced your exposure to lower growth industries, but I assume no one is immune to the pain that's happening in brick and mortar retail. First off, I know it's a small number, but can you remind us what your exposure is to brick and mortar retailers, especially on the apparel side? Then second, is there a risk that challenges could show up for some of your other tenants, like 3PLs, that have retail exposure of their own, almost like shadow retail exposure for ProLogis?

This is Chris. Thanks for the question. First, as it relates to apparel specifically, that is roughly 7% of our customer base, and there's going to be both native e-commerce and traditional brick and mortar retailers in there, so you're going to have a diversity. Our approach, our analysis, looks through the organization, so whether it's a retailer, whether it's a 3PL. We think through that exposure just like you described. The way we've been talking about it for the whole decade has been consistent with how you're thinking about risk.

Your next question comes from the line of Mike Mueller from JP Morgan. Your line is open.

Hi. Are there any changes to the lease durations for the bumps that you've been getting in recent leasing activity?

Not materially. Mike, not materially. Right before this thing, lease durations had extended. It was probably the longest we've seen in about a decade. Basically, leases that are of term have stayed about the same level of duration, but we have higher -to-month leases, and that is pretty typical of what happens in this part of the cycle, where normally somebody whose business was growing may be coming out of a smaller space, going to a bigger space, or going the other way, frankly, but moving is expensive, and committing to a new space is expensive. Sometimes the best solution is just to basically pay overage rent and kick it out a couple of months. We have a higher percentage of leases under one year, but the ones that go longer than a year are about the same profile as they were before. With respect to escalation structures, pretty much consistent with before, slightly more free rent on the front end, which is how the effective rent comes down. I think Tom mentioned that the effective rents were down 1.7%. Face rents haven't changed all that much in most markets.

Your next question comes from the line of Nick Ulico from Scotia Bank. Your line is open.

Hi guys, Sumit here again. Thank you for taking my question again. Walmart is closed on Thanksgiving, and that goes to assume that they're expecting more online sales traffic. Layering in Prologis' U.S. portfolio and thinking about it from an infill perspective, how does that manifest in terms of increased rent growth for those properties? What I'm thinking of is not your properties off of Tracy or Exit 8 in New York City, but more the kind of stuff that you have in the meadowlands in New York City or Bronx. When you're underwriting these properties, what's rent growth you're putting in today? How does situations on the grounds like what we're hearing with Walmart and other retailers change your view?

The thing I would say about Walmart specifically is that obviously we had them in one property in the Bronx. As you probably have read in the headlines, they no longer needed that property because of what you described, and we were able to release it with no interruption to another major e-commerce player at actually very attractive economics. That's the only direct impact that I can see from Walmart if your question is specific to Walmart. They didn't have much of a presence in the New York area anyway for it to be a headwind. They were just really getting started. They tried for many years to get into that market, but it's proven to be a difficult market to get into. It appeared for a while that e-commerce was the way they were going to come into the market, and apparently they've changed their mind. I don't know if your question was broader than Walmart, but that's the story with Walmart.

Your next question comes from the line of Manny Quershman from City Group. Your line is open.

Hey, it's Michael Billerman with Manny. To me, the November investor day, one of the topics the team spent a lot of time focused on was trying to have value beyond the real estate and really trying to find solutions to a lot of the supply chain costs that would essentially allow you to be able to garner more rent. Looking at transportation, digital and data solutions, looking at labor costs, and trying to find opportunities for your tenants to reduce those costs and ergo allow them to pay you more rent. I think you talked a little bit earlier before about how rent is a smaller part of the overall cost structure. Therefore, if we're able to get benefits on all those other items, we should be allowed to charge more rent. Where do you stand and have you been able to advance any of these initiatives further, ultimately getting to that $150 million of potential upside over time as you implemented these things?

Sure, Michael. I'm glad you brought that up because that's a very important part of what we're spending time on. I'll let Gary give you the real answer. From my vantage point, our performance there has been mixed. With respect to the things that are going very well, I would say our LED initiative, our procurement initiatives, our services, and our product offerings that go with the use of warehouse are going pretty well and are generally on track. The more aspirational aspects of our product offerings, transportation, IoT, I would say those are too early to have a result. On the labor front, we're actually making really good progress as well. It's a mixed picture. COVID has also obviously interrupted our ability to market some of those services to our customers. They're, frankly, focused on other problems right now. But we've come up with new products to offer to them in this time, like deep cleaning services and other things that we rolled out were specifically targeted towards COVID. I would say our enthusiasm for that business is the same or stronger than it was and I would say materially stronger than before. Our execution of it has been pretty good in some areas and has been interrupted by COVID in some other areas. But we haven't changed our objectives in the medium term on that. Gary, do you want to provide more color?

Just a little bit, Mike. Look here. Remember we had shown a bullseye at that and the center of the bullseye is the area that we were currently focused. Those are the areas that Hamid was talking about. And that's the area that we've gotten some pretty good traction. So in growing revenues there, it's not huge. So we'll take a look at the outer rings, which would be labor, transportation, and IoT. And as Hamid said, those are a little bit longer term. And I think we're more optimistic about essentials than we were even at that point.

Your next question comes from the line of Kib and Kim from SunTrust. Your line is open.

So if I remember correctly, when you guys bought Liberty and ICT, it was part of the original plan to sell a lot of assets and you've done a lot of it already. But I believe 2021 was supposed to be a material year for just solutions. Any update to those plans?

Yeah, Kib and if you remember in the last call and actually the call before that,

we

pushed that back. We are very under deployed right now. Our leverage is under 20%. And so there is no rush whatsoever to sell those properties. If you do a little bit of poking around, you'll pretty quickly figure out that we've got a pretty significant portfolio from Liberty for sale in the UK. And that one, we're in the process of collecting letters of interest and offers. And I would tell you that demand for that product is triple or quadruple what we expected. And I think we're going to have a very strong execution on that. But on the rest of it, we haven't even put out the packages because why do it? We don't need to do it right now. That's very liquid real estate and we can do it at any time. And our decision is to push that out until we have more deployment and need the capital frankly more.

Your next question comes from the line of John Peterson from Jeffries. Your line is open.

Great. Just a quick one. I know we're coming up on the hour here. Any chance you guys could break out rent collection between Europe and the US? Asia is smaller, but maybe there too. I'm just curious if there's any material difference between those markets.

Yeah, we actually look at that on a daily basis. And obviously even more detailed than what you just asked. We look at it by country and we can have the ability to actually drill it down by market. So obviously we're always focused on collections, but I would say we've been a lot more focused on collections in the last four or five months and we have very good data on that. I would say there are two countries that stand out as collections being materially lower than elsewhere. And those are France and the UK. And part of it is that the government has gone out and basically said you don't have to pay your rent. And so a lot of people are, and a lot of very healthy companies, I mean household names are just choosing not to pay their rent for now. But the ultimate collection of those numbers, of those rents are not subject to those regulations and we believe we'll collect the vast majority of them. But if you take those two markets out, Asia is on the other side. We have no deferrals or no late payments almost or no defaults to speak up in Asia. So if you throw it all in the blender, the numbers are very comparable between the US. They're within a couple of hundred basis points between the US and the rest of the world, with the two that I mentioned being the meaningful deviations. I think that was the last question. So that's all the logistical glitches today, but that's the world we live in and we look forward to talking to you next quarter. Take care.

That concludes today's conference call. You may now disconnect.