Prologis Inc (PLD) — Q2 2020 Earnings Call Transcript

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 guarantees 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 10-K 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 Caton, Mike Curless, Ed Nekritz, Gene Reilly and Colleen McKeown 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 $0.23 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 92.1% of June and July rents, respectively. 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 same-store NOI growth was 2.9%, which included a 42 basis point negative impact from bad debt. Turning to leasing and customer activity, segments benefiting from the 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 1.7% of our annual rent. Over the last 30 days in our operating portfolio, we've signed leases amounting to 60.3 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. Completion 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 4.5% and 2%, respectively. Strong leasing activity in the quarter has moved the following markets off of our watchlist; Central PA, Phoenix bulk, Atlanta bulk and Guadalajara. Our watchlist 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 queues 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 queues 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 in combined leverage capacity between Prologis and our open-ended vehicles at levels in line with current 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 our 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 basis points 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 the year. To date, 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 slipped slightly in the second half, so not as much as we guided to in April and end the year at a very healthy level. Globally, net effective rents declined by 1.4% 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 million and $370 million. We're increasing our net promote income for the full year to $0.20 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 $0.03 per share. We are forecasting a G&A range of $265 million 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 spec in the second half. Our revised starts range is $800 million to $1.2 billion for the full year, with build-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 are now projecting net uses of capital to be $100 million at the midpoint. Taking these assumptions into account, we're increasing our 2020 core FFO midpoint by $0.125 and narrowing the range to $3.70 per share to $3.75 per share, including $0.20 of net promote income. This compares to our original guidance midpoint at the beginning of the year of $3.71 a share. Year-over-year growth at the midpoint, excluding promotes of sector-leading at over 12.5%, while keeping leverage flat. Our three-year CAGR has been 10.5%, outperforming the other logistics REITs 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 repeat some comments at the beginning because I'm not sure my sound was coming through. So, I just want to repeat our results for the quarter. Core FFO for the second quarter was $1.11 a share, which included $0.23 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 2020 guidance that we provided back in January. Overall, rent collection trends are excellent and as of yesterday, we have collected 98% and 92.1% 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 same-store NOI growth was 2.9%, which included a 42 basis point negative impact from bad debt. Turning to leasing and customer activity segments benefiting from the 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 at 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.

Thanks. Good morning, Tom. I appreciate you reiterating some of that information. I wanted to follow up on the leasing activity. I noticed that in your supplemental report, you shared data on leases that commenced rather than those that were actually signed during the quarter. Could you help us understand the leasing activity during Q2? How much of that was affected, and how does it vary month to month to reach the 60.3 million square foot total for the last 30 days? Additionally, could you address the decline in occupancy in Asia? Thank you.

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.

Next question, please.

Hey guys. Just a quick question on kind of what activity you're seeing big box or small box. I know there were some concerns earlier post-COVID. Just curious, 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 has led to taking those markets off the list. And conversely, small spaces have struggled. We see 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.

Okay. Next question, please.

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 for expansionary space? And second question, when you mentioned all the positive leasing stats and you obviously increased your guidance for same-store NOI and build-to-suit activity. But if there are one or two things that you really looked at to give you confidence 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. We're experiencing some difficulties with our conference operator. The activity picked up significantly in June and is quite widespread. A strong indicator of this can be seen in our build-to-suit volume, which has increased notably in both percentage and absolute terms. This highlights the limited availability of space, as it's becoming the preferred option for meeting space requirements. Mike, would you like to expand on this?

Yeah. We're seeing broad-based activity, everybody. If you believed all the hype you saw there, you would think it's all Amazon. But Amazon clearly is ramping up their activity, but we're seeing definite broad-based activity across a lot of sectors. Home improvements picked up. The appliance business is strong and actually seen quite a bit of activity from the food crowd on our build-to-suit list. Then you 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 are a big part of it, but look, for a lot of broad-based demand and keep that build-to-suit list strong.

Hi. This is Sumit here for Nick. Just a quick question actually, following up on the build-to-suit. So there was, I think 100% of the pipeline this quarter was build-to-suit with a 48% margin. What's so special about these development specs that they are so accretive to the margin and there is 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 the fourth quarter has something coming up from Brazil, a core fund in Europe and the USLV. So, what's driving the lower expectations on promote income for those?

Sumit, it's Mike. I'll hit the first one on the higher than normal build-to-suit margins. You're looking at a small sample that said, there are a couple of deals there that were more of the parking lot, leased 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 and normalize to the overall build-to-suit body of work in the mid-20s. Tom, you want to deal with the other one?

Yeah. 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 is very little AUM in those funds. That is promote eligible in the second half. And remember, we've got $0.03 of promote expenses that will also be incurred in the second half of the year.

Hi, everybody. Thank you. Has COVID-induced e-commerce acceleration pulled demand forward in your view? And secondly, where are we in the 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. E-commerce started the year in the low teens in the US. The numbers vary in different places. And there is no telling how far it can go. If it goes to 20% to 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 initially, obviously, we've had a clear market leader, which is Amazon in excess of 40% of the total volume, but we are seeing breadth in terms of different 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' demand.

Hi, everyone. 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 our 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 of this point of view and trying to keep their build-to-suit volumes high and their spec volumes lower? Are we running the risk that we're going to see a lot more spec not from Prologis, but from your competitors or peers?

Let me address the second part of your question first. The instances of undisciplined development are limited, with Poland being one notable example and Houston experiencing more construction than necessary for the current demand. Generally, I wouldn’t say we have a significant issue with older buildings. The construction numbers, as mentioned by Tom, are at approximately 250 million square feet, which is about the typical rate for construction and slightly lower than our initial forecast for the year. While I anticipate that demand will fall short of this construction level this year, it’s not due to an oversupply; rather, it’s because demand is expected to dip temporarily. I believe demand will pick up again due to the increasing e-commerce sector and the necessity for higher inventory levels. Regarding your first question, could you repeat that? Ah, conversions. There is much discussion about conversions, especially regarding retail properties, and I think we will see more conversions in the future. However, there are significant hurdles to overcome. For instance, a retail box within a shopping center is bound by various reciprocal easement agreements, making redevelopment challenging. These boxes are typically positioned in desirable locations due to their proximity to dense populations and affluence, but internal dynamics complicate redevelopment. Zoning is another challenge, as changing from retail to industrial zoning takes longer than expected, due to neighborhood resistance to increased truck traffic. Additionally, economically, retail spaces are valued at several hundred dollars per square foot, but for logistics to be viable, the price needs to be significantly lower, especially after accounting for conversion costs. I expect that over time, we will see more of these types of developments, but it will not happen all at once. We are engaged in several of these projects, but the process is more challenging and time-consuming than one might think.

Thank you for taking my question. I have two queries. First, can you provide more details on how market rent growth has trended over the past few months, especially in the US compared to global trends? Second, could you elaborate on how you're utilizing your current capital, which has improved since a few months ago? I'm curious about how this is being allocated towards development, acquisitions, and possibly M&A.

Thank you, Vikram. I have two questions. Regarding market rents in the US, I believe they are on a similar trajectory as before, but experiencing a pause. In this COVID era, rent growth has stalled, and I expect it to plateau for the remainder of the year, as our guidance indicates, before resuming growth. My confidence stems from the fact that we haven't seen a cycle leading up to this point, with high occupancies below 5% vacancy rates and utilization rates in the mid-80s. There are no indications that these metrics are declining, so I believe the market remains strong and will return to a growth path similar to our earlier projections. As for capital usage, I see limited differences among companies, making M&A challenging. Although we have successfully executed a couple of deals, suitable targets are increasingly less aligned with our portfolio quality. Additionally, companies are trading at similar multiples despite historically different growth rates. While I cannot control market reactions, the optimal capital strategy for us is expanding our land bank, as we already own the land, which leads to attractive returns, particularly given the margins we discussed before. This development approach is disciplined, and while we can't infinitely pursue this type of development, it is our primary focus. Regarding the acquisition of assets, I previously mentioned that I don’t expect logistics real estate pricing to soften. In fact, I anticipate cap rates will compress due to substantial capital flowing into real estate, particularly in sectors that continue to perform well. Therefore, I believe the best capital usage is still in building our land bank.

Thank you. You talked about leasing volume being healthy, sounds like it's picking up. But you also discussed the 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 bad debt expense or is there other factors that contribute to this?

Yes, John. It's Gene. I want to address that. I wouldn't come to a conclusion about our optimism regarding demand based on the forecast for the next two quarters. Demand has been strong. As we stated at the beginning, about 60% of our portfolio has customers who are growing, while some are decreasing. Therefore, we have a balanced perspective for the remainder of the year. The reality is that we won't have complete clarity until we emerge from COVID and see economies reopening. I would actually suggest that later in 2021, we will see an end to this situation. And as Hamid mentioned earlier, I believe we will continue to see rent growth. However, until there is clarity on the reopening, we need to maintain a balanced view.

Yeah. And the only other thing I would add to that is at the beginning of the year, we were forecasting essentially 260 million feet of demand and supply, and now we're projecting 250 million feet of demand and 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 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, namely, an increase in inventory generally 5% to 10% and also the stabilizing share of e-commerce at a 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 project to lose this year. But nobody knows, I mean, these are all our best guesses.

Thank you. It was a good quarter. I would like to first hear an update on how IPT and LPT are performing compared to your underwriting. Additionally, I am interested in how these transactions have significantly increased your exposure to the US. Given that international markets appear to be recovering faster than the US, how are you approaching the balance between US exposure and 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 has weakened 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 leasing up pretty much everything we are building ahead of schedule. So obviously, there is a wide variety overseas. But if you sort of throw all of the overseas markets together, I would say generally, they are a tad slower than the US, but not materially so. And Gene may have more granular comments on that, but very consistent actually in terms of market strength.

We are currently progressing ahead of our underwriting expectations for both portfolios, despite recent trends. We plan to reassess this at the year's end, but overall, the outlook is positive. The situation in Houston for Liberty remains challenging for now, however, the Pennsylvania portfolio, which is the largest segment, has performed quite well. This success has led us to reinstate Central Pennsylvania on our priority list for both metrics, exceeding our initial projections so far.

Thank you. I wanted to get your insights on two points. First, I know you discussed this year's development pipeline and deliveries. Can you provide some details on what to expect heading into 2021, considering the recent pullback in starts? Secondly, since you raised your guidance, I'm curious about the risks that remain, such as the election, the ending of PPP subsidies, and rising cases in other markets. What led you to feel more optimistic despite these ongoing concerns?

Customer behavior in short. Jamie, Gene is 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 in 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 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.

Good morning. I was thinking about your portfolio as you've shifted more towards service-oriented customers instead of distribution-oriented ones. I'm curious about how those discussions are going with your customers and if you're still aiming for year-end rent targets that they are on board with. Is there a significant gap between their rent expectations and yours? Also, regarding cap rate compression, do we need to see vacancy rates increase before we witness any substantial change, or is the situation on the debt side enough to drive that change? Thank you.

Dave, I'll begin and Gene will provide more specifics. We're already witnessing cap rate compression, especially in Europe. There is ample transaction evidence indicating that these cap rates are stable and, in some cases, decreasing. This aligns with our valuations, which have remained flat, and it’s important to remember that valuations reflect past transactions. If they accounted for recent transactions, I believe those values would rise. Regarding the distribution of space, as we have mentioned repeatedly, Prologis functions across all four space categories, from last touch to gateway cities, and in larger spaces within major markets. This distribution remains quite balanced. Furthermore, we have a recent paper detailing our allocation in each category. We haven't significantly altered our market allocations; rather, the inquiries about last touch markets have increased recently. Historically, our strategy focused more on large markets compared to infill locations, which is the source of that portfolio segment now receiving much attention.

The only thing I'd add is that you specifically asked about rent growth in infill locations. To date, we have certainly seen much higher rent growth in these areas. As you can imagine, there is some market pricing discovery occurring because these submarkets are generally immature for this kind of use, and the product types vary widely. So far, the growth in rents has actually surprised us positively.

One other thought I want to add is that we've discussed this several times, but logistics rents account for only 2% to 5% of total logistics costs, with the remaining costs being labor and transportation. Therefore, the customer's ability to pay is not the main issue; even if they paid 20% more rent on an item, it would only contribute an additional 80 basis points to their total logistics costs. What really drives rental growth is how competitive your next best competitor is regarding lowering rents. This is the key factor, not the customer's ability to pay. Generally, when operating at around 5% vacancy, as we are, there aren’t many competing spaces available. As a result, we continue to maintain pricing power in most markets, although areas like Houston vary.

Great. Thanks. Good morning out there. So just a couple of questions here on rent collections and same-store. 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 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 rents, it's still a pretty tangible headwind then 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 2.9% with even a few percentage points of uncollected cash rents. That would be really helpful.

In June, we collected 98% of rent, and in July, it was 92.1%. We deferred about 1.95% of rent in June and around 0.7% in July, which is not included in those collection figures. Our collections have been performing exceptionally well, consistently ahead of last year since March and outpacing our schedule every month. We expect to collect almost all cash except for what's covered by our bad debt reserve. We have thoroughly assessed various industries and customer metrics across our portfolio, and we are confident in our bad debt estimate of 0.6% to 0.9%. This is significantly lower than our April projections, mainly due to strong collections. Historically, our average bad debt has been around 0.2% over the past 14 to 15 years, with a peak of 0.56% during the global financial crisis, which aligns with what we experienced in Q2. I believe we've adequately managed the bad debt situation for the second half and feel optimistic about bringing in the remaining cash.

Thanks, Gene. I would like to explore the individual market trends you mentioned. Can you explain what contributed to the improvement in Central PA? Is it simply increased demand? Additionally, regarding the challenges in Houston, is that primarily due to supply issues in a weak energy market? Are developers slowing down construction, meaning it will take time to absorb that space, or are there longer-term challenges we need to address?

In Pennsylvania, the improvement is entirely related to leasing. In Houston, there are two main challenges affecting demand: energy pricing and COVID. Additionally, there is a significant amount of construction that was underway at the start of this year. While some of that was put on hold, the majority continued, leading to an oversupply of space that will likely extend into next year. Regarding developers' discipline, it's uncertain at this point. Currently, it seems they are maintaining discipline, but I expected to see more projects halted than we actually did. We need to keep an eye on this situation, but unfortunately, Houston faces both supply and demand challenges.

Thank you. I'd like to revisit the topic of e-commerce. Clearly, Amazon has been quite active. Mike, you mentioned some of the ongoing supply chain adjustments being made by companies in home improvement, appliances, and food and beverage. Can you discuss how large retailers are adapting, especially considering the significant increase in their e-commerce sales? I'm interested to know if they are modifying or planning to modify their warehouse capacities.

Yes, Eric. Thank you. We are 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 more warehouse to consumer shipments. So, we're definitely seeing an uptick in that segment.

Yeah. Home improvement and grocery sectors are particularly strong.

Thank you and good morning. I just wanted to actually follow on Eric's question about retail and 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. So 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? And then second, is there a risk that challengers 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?

Hey. This is Chris. Thanks for the question. So first, as it relates to apparel specifically, that is roughly 7% of our customer base and there is 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, so we think through that exposure just like you described in. So the way we've been talking about it for the whole decade has been consistent with how you're thinking about risk.

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

Not significantly. The lease durations had recently extended, likely the longest we've seen in about a decade. Generally, leases with fixed terms have maintained a similar duration. We are seeing an increase in month-to-month leases, which is typical during this phase of the cycle when businesses may be transitioning to larger or smaller spaces. However, moving and committing to a new space can be costly. Therefore, sometimes the most practical option is to pay extra rent and delay the move by a couple of months. As a result, we have a higher percentage of leases under one year, while those exceeding one year remain consistent with previous profiles. In terms of escalation structures, they are largely unchanged, with slightly more free rent at the start, contributing to a decrease in effective rent. As Tom pointed out, effective rents have decreased by 1.7%, while face rents have not fluctuated much across most markets.

Hi, guys. Sumit here again. Thank you for taking my question again. So Walmart is closed on Thanksgiving, and that goes to assume that they are expecting more online sales traffic. Layering in Prologis' US 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 New York City, but more kind of stuff that you have in, let's say, the Meadowlands in New York City or Bronx. When you're underwriting these properties, what's the sort of rent growth you're putting in today? And how do situations on the ground like what we are 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. And as you probably have read in the headlines, they no longer needed that property because of what you described and we were able to re-lease it with no interruption to another major e-commerce player at actually very attractive economics. So that's the only direct impact that I can see from Walmart if your question is specific to Walmart. And they didn't have much of a presence in the New York area anyway too, for it to be a headwind. So, they were just really getting started. They had tried for many years to get into that market, but it had proven to be a difficult market to get into. And 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.

Hi. It's Michael Bilerman with Manny. Hamid, at the November Investor Day, one of the topics the team has 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. So looking at transportation, digital 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. And 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 from all those other items, we should be allowed to charge more rent. Where do you sort of stand? And have you been able to advance any of these initiatives further, ultimately getting to that, I think it was like a $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 are spending time on. And I'll let Gary give you the real answer. But from my vantage point, our performance there has been mixed. So 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. So it's a mixed picture. COVID has also obviously interrupted our ability to market some of those services to our customers. They are frankly focused on other problems right now. But we 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. And so I would say, our enthusiasm for that business is the same or stronger than it was before 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 there?

Sure, Michael, as you may recall, we presented a bull's eye at our Investor Day, highlighting the areas we are currently concentrating on. These are the areas mentioned by Hamid. During this time, we've made solid progress and are seeing some revenue growth, although it's modest. The more ambitious projects related to transportation and IoT are taking longer than expected and are more long-term. In conclusion, we are feeling more optimistic about the essentials, and that's where we stand.

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

Yes, Ki Bin, as mentioned in our previous calls, we have delayed those plans. Currently, our deployment is low, with our leverage under 20%. Therefore, there's no urgency to sell those properties. If you look into it, you'll find that we have a significant portfolio from IPT and Liberty for sale in the UK. We are in the process of collecting letters of interest and offers, and I can say that the demand for that asset is much higher than we anticipated. We expect to perform strongly in that area. However, for our other assets, we haven’t released the packages yet because there’s no need to rush. These are liquid properties, and we can manage that whenever we choose. Our decision is to hold off until we have more deployment and can better align with capital needs.

Great. Just a quick one. I know we are top 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 is any material difference between those markets.

We monitor this daily, diving deeper than what you just inquired about. We analyze it by country and can break it down further by market. Our emphasis on collections has heightened significantly over the past four to five months, and we have robust data in this area. Two countries where collections are notably lower are France and the UK. This situation is partially due to government directives stating that rent payments are not mandatory right now, leading many companies, including some well-known ones, to delay their rent payments. However, we believe we will ultimately collect most of those amounts. In contrast, when we look at Asia, we have not experienced any deferrals, late payments, or defaults. Overall, when we compare the figures, they are quite similar between the US and the rest of the world, apart from the two markets I mentioned, which show significant differences. That concludes all the questions. I want to thank you for joining us, apologize for the logistical issues today, and look forward to speaking with you next quarter. Take care.