Duke Realty Corp. (NYSE: DRE) Q1 2020 Earnings Call Transcript

Duke Realty Corp. (DRE) Q1 2020 earnings call dated Apr. 30, 2020

Corporate Participants:

Ron Hubbard — Investor Relations

James B. Connor — Chairman and Chief Executive Officer

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Mark A. Denien — Executive Vice President and Chief Financial Officer

Nick Anthony — Executive Vice President and Chief Investment Officer

Analysts:

Sumit Malhotra — Scotiabank — Analyst

Michael Mueller — J.P. Morgan — Analyst

Jamie Feldman — Bank of America Merrill Lynch — Analyst

Jeremy Metz — BMO Capital Markets — Analyst

Blaine Heck — Wells Fargo Securities — Analyst

Dave Rodgers — Robert W. Baird & Co. — Analyst

Emmanuel Korchman — Citi — Analyst

Richard C. Anderson — SMBC Nikko Securities — Analyst

Ki Bin Kim — SunTrust Robinson Humphrey — Analyst

Michael Carroll — RBC Capital Markets — Analyst

Vikram Malhotra — Morgan Stanley — Analyst

John Guinee — Stifel Nicolaus & Co. — Analyst

Eric Frankel — Green Street Advisors — Analyst 

Presentation:

Operator

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the Duke Realty First Quarter Earnings Conference Call. [Operator Instructions]

At this time, it’s my pleasure to turn the conference over to our host, Vice President, Investor Relations, Mr. Ron Hubbard. Please go ahead.

Ron Hubbard — Investor Relations

Thank you, Tom. Good afternoon, everyone, and welcome to our first quarter earnings call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien Chief Financial Officer; Steve Schnur, Chief Operating Officer; Nick Anthony, our Chief Investment Officer; and Mark Milnamow, Chief Accounting Officer.

Before we make our prepared remarks today, let me remind you that statements we make are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you to our December 31, 2019 10-K that we have on file with the SEC.

Now for our prepared statement, I will turn it over to Jim Connor.

James B. Connor — Chairman and Chief Executive Officer

Thanks, Ron, and good afternoon, everyone. First on behalf of all of our associates, we hope all of you and your families are safe and well. Our prepared remarks today are a little longer than normal, which we believe is appropriate given the market volatility and considering that we’ll not be meeting in person at NAREIT in June. We’re going to provide more detail on our first quarter results, what we’re seeing in the markets and our re-projected guidance for the balance of the year. My opening remarks, I’ll comment on three topics; our initial response to pandemic, our first quarter highlights, how the leadership team is managing today’s challenging operating environment, and then I will turn it over to the balance of our team.

First, I’d like to thank the Duke Realty team around the country who are demonstrating great resilience and adaptability amidst the global pandemic. Thanks to our state-of-the-art technology and previous business interruption planning steps, we have seamlessly transitioned in the telecommuting. We are continuing to collaborate and execute on all facets of our operational and financial functions. This includes steps to ensure everyone’s safety and health in line with CDC and various government guidelines. No one from the Duke Realty team has contracted the COVID virus, and all of our team continues to perform at a high level throughout this challenge — the challenges of this pandemic.

Turning to a few operational and financial highlights for the quarter. We achieved 33% rent growth in our second generation leases. We signed 4 million square feet of leases. We started three developments totaling $117 million, all 100% pre-leased. And we bolstered our balance sheet with an unsecured note issuance that was refinance. We now have no significant debt maturities until the fourth quarter of 2022.

Now let me highlight the focus areas of our leadership team as we manage through the current operating environment. We clearly cannot predict the timing or the depth of the coming cycles, but by covering the following areas we do get a sense of direction and potential magnitude of our change within our business. First, we’re actively in dialog with all of our existing customers for operational issues pertaining to the COVID safety protocols and/or for collection of rent, and in certain situations, potentially entering into a rent deferral plan.

Second, for our development pipeline, we are very focused on maintaining worker safety, maintaining project delivery schedules and project budgets amidst any government mandated safety protocols and shutdowns. Steve Schnur will speak more in depth on this in just a moment. Third, on major capital deployment, we’ve decided to temporarily halt any new speculative development starts, acquisitions or dispositions until we have more clarity around the timing and impact of the post-COVID world. Mark will layout more specifics on 2020 expectations in just a few minutes.

Fourth, we are implementing cost savings measures to help manage G&A depending on the length of the shutdown and the pace of the economic recovery. Fifth, we’re focused on monthly performance trends and modeling expected cash flow scenarios, and the underwriting team is providing more frequent tenant credit updates, since we’re closely monitoring supply and demand trends in each of our 20 markets, both for the near-term and looking forward into 2021. And finally, the executive team is meeting weekly and sometimes daily to lead and communicate a roadmap to our organization as well as our board of directors.

And now let me turn it over to Steve to cover the operational side.

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Thanks, Jim. I’ll first cover overall market fundamentals, then I’ll review our operational results, and finally touch on the topic of rent collections. The quarter ended up relatively strong on the demand front, given the lack of availability of space. And even with decision-making starting to slow in early March, the market achieved about 35 million square feet of absorption. Deliveries were about 55 million square feet, equating to a mid-4% vacancy rate at quarter end.

As you’d expect, the outlook for demand in 2020 is going to decline from the slowing economy. While it’s too difficult at this time to predict a range of demand given the leasing trends we’ve seen in the second half of March and through April to-date, we are seeing demand from important industries such as food and beverage, healthcare, reverse logistics and other basic necessities. And of course the direct-to-consumer e-commerce type of demand.

What the exact demand offset will be from customers vacating space is not yet clear. And I think we’ll know a bit more as we get into May, June on this topic. But if we assume the stress scenario of little to no new demand and completing the under construction pipeline in the market today of about 140 million square feet, you’d probably be looking at a vacancy rate of 5.3% to maybe an upper bound of 5.8% in the first half of 2021.

However, we believe given this new area of social distancing and more stay at home activities and with the potential of more inventory resiliency and safety stock planning later this year, the demand for incremental inventory storage and direct fulfillment space should stay fairly solid. It will likely increase into 2021 when we see an economic recovery. I would also note that we, as well as all of our public peers who have reported to date have pulled back on new speculative development starts, so I think it is likely we will see a significant decrease in deliveries going forward, and therefore, a fairly balanced supply-demand equation in 2021.

Turning to our own portfolio, even with the market starting to soften in mid-March, we still executed a very solid first quarter by signing 4 million square feet of leases. This is higher than the first quarter of 2019. Nearly half of this activity was in March and it included — and included in the $4 million were 850,000 square feet of short-term leases, which is consistent with our past performance in short-term leasing activity.

Thus far in April, we have executed 1.9 million square feet of new leases. These leases include a long-term lease for 200,000 feet Nashville with a tenant who had signed a short-term deal in the first quarter, a 650,000 foot early renewal in Northern California, a 450,000 foot renewal in Columbus and a 300,000 square foot transaction across two properties in Raleigh. As you can see by these deals, demand currently is stronger across larger spaces and the average lease term for our first quarter lease transactions was 6.7 years.

When considering renewals and immediate backfills, we re-leased 79.2% of our expirations during the first quarter and closed the quarter with an in-service occupancy level of 96.5%. The lease activity for the quarter, combined with strong fundamentals, led to another great result and rent growth, as Jim mentioned, of 17% cash and 33% on a GAAP basis. The mark-to-market in our portfolio of leases is about 15% pre-pandemic rental rates. In addition, we have only 5% of our leases expiring in 2020 and 9% in 2021. These low expirations, coupled with the mark-to-market estimate, supports a likely lower level of volatility and net operating income compared to other companies with much greater levels of annual lease expirations.

Now I’ll cover our recent rent collection performance. As of this morning, we’ve collected a 100% of both our January and February rents, 99.6% of our March rents and over 97% now of our originally-built April rents. I would also add that we have collected about 22% of our May rents to date. We have a detailed process we go through if we get a request from a tenant for a deferral.

First, we encourage the customer to look at all available liquidity sources such as their bank facilities and any government lending programs. Next, we provide each tenant with a checklist requesting their financial statements, evidence that they have applied for one of the government lending programs if they qualified and what other measures they are taking to reduce cost and improve their operating performance. We then perform an updated credit review process and assess the staying power of the customer. At that time, we will conclude on the decision whether to offer some type of deferral. Although it’s still early in this process, we generally see these agreements result in a two months to three months of partial base rent deferral, with the deferred amount to be paid back with interest generally within six months to 12 months.

As we reported in our press release last night, we’ve received request for rent deferrals from about 24% of our tenant base. It is important to note that only a portion of these are being considered at this time. As I — our smaller tenants are definitely feeling the impacts of this environment more acutely, as evidenced by the fact that majority of our requests have come from tenants under 100,000 feet.

I would also add that of the 5 million square feet of leasing we have done to date, when you exclude short-term leases, only 16% of this activity is from tenants less than a 100,000 feet. Until there is more clarity on the length of the COVID shelter-in-place government orders and development of COVID treatments, the near-term is a bit uncertain regarding the outcome of rent deferrals. Going forward, and as Jim alluded to in his opening remarks, we’ll maintain active dialog with our customers with a focus on maximizing our monthly rent collections.

Let me also point out that we feel we have a very strong customer base, including our top tenants such as Amazon, UPS, Target, Home Depot, Walmart, Clorox and Samsung, just to name a few. Coupled with our relatively longer lease terms and lower rollover, it is our view that this has been an under-appreciated aspect of Duke Realty’s risk reward equity proposition, particularly for those investors with the long-term horizon.

We also had a strong quarter of development starts, as Jim mentioned, in spite of the growing uncertainty. We broke ground on three build-to-suit projects totaling $117 million, all 100% leased. Our development pipeline at quarter end totaled $1.1 billion with 74% of these assets allocated to coastal Tier 1 markets. This pipeline was also 61% pre-leased at March 31.

Regarding the timing and delivery of various government actions to close down certain businesses deemed non-essential, we’ve had two of our 21 projects incur some sort of work stoppage with one of them now back online. We expect a minor completion delay on only one project and only by about two months to three months as that project will now be back online next week.

At the project site level, we’ve been actively engaging with contractors and prospective tenants. And the Duke project teams are doing a fantastic job of minimizing the impacts. We’ve not heard of any material issues from tenants’ viewpoints. It seems everyone knows we’re in this together. We’re open for business and we’re working hard to complete all of our facilities.

As of last month, we’ve temporarily suspended all new speculative development starts as is reflected in our updated guidance. Future spec development will depend upon the business environment and the economic outlook for the second half of 2020. We do however have a solid pipeline of potential build-to-suit projects with creditworthy customers that we expect would be an accretive allocation of capital going forward.

As far as acquisitions and dispositions, we had a light quarter of activity. We closed on the sale of a 540,000 square foot building, a 100% leased in St. Louis. As you expect, we have reduced our guidance for dispositions, which Mark will touch on. However, we do have a number of good quality assets that we are still expecting to sell later this year, subject to improving market conditions. Our disposition activity will continue to contribute towards our 70% Tier 1 geographic exposure objective by the end of ’21, as well as provide a source of funds. We’ve also reduced expectations on the acquisition side. We hope to find some opportunistic transactions in light of the market turbulence and have the balance sheet and industry connections to react quickly to take advantage of any opportunities that we see.

I’ll now turn it over to Mark to discuss our financial results and guidance update.

Mark A. Denien — Executive Vice President and Chief Financial Officer

Thanks, Steve. Good afternoon, everyone. Core FFO for the quarter was $0.33 per share compared to core FFO of $0.38 per share in the fourth quarter of 2019. Core FFO was negatively impacted by an approximate $0.03 per share increase to non-cash general and administrative expense compared to the fourth quarter of 2019, which is a normal first quarter item resulting from the accounting requirement to immediately expense a significant portion of our annual stock-based compensation grant.

Core FFO was also negatively impacted by almost $0.02 per share from straight line rent receivable collectability reserves we recognized this quarter for the impact of the COVID-19 outbreak. Improved operating performance from rent growth and increased occupancy largely offset these collectability reserves, resulting in core FFO per share of $0.33 per diluted share consistent with the first quarter of 2019. We reported FFO as defined by NAREIT of $0.28 per share for the quarter compared to $0.33 per share for the first quarter of 2019, with the decrease resulting from an approximate $0.05 per share loss on debt extinguishment cost from the refinancing transaction we executed during the quarter.

AFFO totaled $126 million for the quarter compared to $119 million for the first quarter of 2019. AFFO during the quarter was not impacted by the straight line collectability reserves we recognized during the quarter. Same property NOI growth on a cash basis for the three months ended March 31, 2020 was 6.6%. In addition to increased occupancy and rent growth, same property NOI growth this quarter benefited about 180 basis points from the burn off of free rent compared to the first quarter of 2019. Same property NOI for the first quarter on a GAAP basis was 1.5%, which was lower than the cash number due mainly through a 300 basis point impact from the non-cash collectability reserves recognized this quarter as well as the lack of impact from free rent burn off on a GAAP basis.

I want to discuss our strong liquidity position and point out that we added a new schedule on our supplemental materials on Page 20. As illustrated in this schedule, we expect that funds available for reinvestment will provide more than sufficient liquidity to fund our operations, including the completion of our development pipeline and pay dividends. This is true even when considering the impact to cash collections from the various forms of rent relief that we may extend to certain of our tenants over the next few months.

I’d like to talk a little bit about the accounting impact of rent deferrals on various metrics and liquidity. As long as rent deferral agreements are deemed to be collectible, there is really no accounting impact on FFO, AFFO or NOI. To the extent any of the repayment term stretch beyond one year and there could be an immaterial negative impact in short-term AFFO and NOI offset by positive variances in future years but no impact on FFO. To the extent any rent deferral agreements are deemed to be uncollectible, then they will be included in our reserves for bad debt and obviously impact all these metrics.

From a cash flow liquidity perspective, there will be a negative impact on short-term cash flows but not in any way will be materially — will it materially affect our overall liquidity position. Let me give you an example to show you the magnitude of cash flows we’re talking about. Our monthly gross rent billings are approximately $70 million. If you assume our deferral requests grow to 25% of our annual net lease value and we end up branding relief on even half of those requests, that would be 12% of our tenants on an annual gross lease value or $8.8 million of monthly gross rent. If you then assume that all of the granted requests were for three months of relief at 50% of gross rents each month, that is $13 million of total relieve over three months. This is about 150 basis points of annual revenue.

Our quarterly run rate of AFFO less dividends is approximately $40 million. So even at this level of deferrals in my example totaling $13 million, we have ample liquidity even during these periods in deferral to cover all aspects of our operations and our dividend. Also, we do expect repayment of these deferrals. This does not equate to lost revenue or cash flow.

From a capital standpoint, we executed a transaction prior to the COVID outbreak, which ended up putting us in an even more secure position to weather the crisis. In February 2020, we issued $325 million of 30-year unsecured notes at a coupon rate of 3.05% and used the proceeds for the early redemption of $300 million of unsecured notes that bore interest at a 4.38% coupon rate and were set to mature in June of 2022.

As a result of this transaction, we do not have any significant debt maturities until October of 2022. Wells Fargo’s Credit Research team recently published a report on liquidity, and based on various stress test to EBITDA and at year end projected credit metrics, we ranked the fist strongest out of 63 REITs covered in their universe.

Lastly, what is not included in these liquidity metrics is that virtually 100% of our properties are unencumbered and a very high institutional quality. This provides another reliable source of funds if ever needed. Our leverage metrics are very conservative with net debt to EBITDA at 4.8 times and the trailing 12-month fixed charge coverage ratio of 5.2 times.

I would now like to address the changes to our 2020 guidance that we’ve made from the result of pandemic’s impact on the economy and supply chain. First, we’ve decreased our guidance for core FFO to a range of $1.41 to $1.51 per diluted share from the previous range of $1.48 to $1.54 per diluted share, which equates to a $0.05 decrease to the midpoint. The decreased guidance for core FFO is driven by a midpoint estimated increase of $18 million or $0.05 per share of collectability reserves or lost rents from defaults and delayed lease-up assumptions, including the $5 million charge taken in the first quarter. This equates to a total increase of 210 basis points.

I want to be clear that this 210 basis point increase in revenue reserves, if you will, is not all bad debt. It is all inclusive of cash bad debt, straight line bad debt, lost occupancy from defaults and delayed lease-up assumptions from currently vacant space. If this estimated additional loss of revenue of $18 million or 210 basis points is ultimately correct, the split between the categories that I just mentioned could vary widely based on timing and tenant make-up. But as of now, we are estimating that this 210 basis points increase will be made up of 80 basis points of cash from a combination of defaults and bad debt write-off, 60 basis points from increased straight line reserves, which was already booked in the first quarter and 70 basis points from delayed lease-up assumptions. This is an addition to the 50 basis points of annual revenue we had in our original guidance. So at the midpoint, we now have 260 basis points or $22 million of total revenue reserve.

I also want to point out that these numbers do not necessarily translate to same property results. Bad debt reserves and straight line receivables do not impact cash same property results. And much of our decreased occupancy assumptions in currently vacant space is in properties that are not part of the same property pool. Thus, the total impact on same property is only 150 basis.

We try to take a reasonably conservative approach in coming up with our estimated potential lost revenue given the unprecedented times we are facing. We looked at our overall potential risk exposure from many different ways, including individual tenant concerns for present, exposure to various industries experiencing greater pressures in this environment and exposure to smaller tenants that will have a tougher time withstanding these shutdowns for a prolonged period of time. Our increase to our straight line receivable reserve of $5 million we took in the first quarter is the accumulation of all these reviews.

For perspective, our total straight line receivable balance at the end of 2019 was about $130 million, net of a $7 million reserve at that time. So we increased that $7 million reserve by this $5 million. As I’m sure you can appreciate, this is a very difficult process given the extreme degree of uncertainties at the present time, but we thought it was prudent to take this approach and made sense to increase our reserve at this time given the extreme changes we have been experiencing since year end. Keep in mind our average remaining lease term is 5.9 years. So on average, that is the period of time it takes to collect the straight line receivable balance.

For perspective, in 2009, our industrial portfolio experienced 210 basis points of bad debt expense. About half of that was straight line receivable write-offs and the other half of write-offs of billed receivables. In addition to this 210 basis points of bad debt, we had 150 basis points of loss rent on an annualized basis from vacancy after tenant defaults. So in total, we had 360 basis points of lost rent from just bad debts and defaults in 2009. This is not how we arrived at our estimates for this year, but merely for comparative purposes.

We have a much stronger portfolio and tenant base now than we did back then to come out of this current situation much stronger in the long-term. Also, negatively impacting our core FFO revised guidance are increased carry costs resulting from our decrease in development expectations that would have otherwise been capitalized.

For similar reasons, the core FFO in addition to the loss on debt extinguishment we took in the first quarter, we have also decreased our guidance for NAREIT FFO to a range of $1.32 to $1.44 per share from the previous range of $1.42 to $1.52 per share. We are also revising our guidance for the change in adjusted funds from operations on a share adjusted basis to range between 0% and an increase of 6.2% from the previous range of 3.1% to 7.7%. As stated earlier, a portion of these estimated bad debt charges that may negatively impact core FFO do not have any impact on AFFO. Even with these revised expectations, our current quarterly dividend rate of $0.235 per share, the durability of our dividend remained strong with coverage against adjusted funds from operations in the high-60% to low-70% range.

For same property NOI growth on a cash basis, we have decreased our guidance to a range of 1.75% to 3.25% from the previous range of 3.6% to 4.4%. Cash same property NOI growth for 2020 will be impacted positively by growth in rental rates on second generation leasing, yet offset by expected collectability reserves on billed receivables and lost cash rent from the challenging economic conditions for a number of our tenants. The bad debt expense from straight line rents will not impact same — cash same property growth, but will impact GAAP same property. So the variance between cash same property growth and GAAP same property growth will be wider than normal at about 200 basis points to 300 basis points.

As Steve noted, we have temporarily halted new speculative development starts, which was the primary driver to our downward revised guidance for 2020 development starts, which is now in a range of $275 million to $425 million compared to our original 2020 guidance of $675 million to $875 million. We’ve also temporarily to new acquisitions and dispositions, which were the primary drivers lowering our estimate for disposition volume to $125 million to $250 million from the original guidance of $300 million to $500 million.

Finally, we decreased our guidance for our stabilized in-service average occupancy to a range of 95% to 97%, a decrease of 100 basis points from the original midpoint, while we’ve decreased our guidance for total in-service average occupancy to a range of 94.4% to 96.4%, which is a decrease of 70 basis points from the original midpoint. The monetary impact of this expected occupancy decrease is included in the 2020 — in the $22 million or $0.06 per share of total revenue reserves I mentioned earlier.

I’ll now turn it back to Jim for a few closing remarks.

James B. Connor — Chairman and Chief Executive Officer

Thanks, Mark. We closed the first quarter of 2020 in the midst of a global health crisis and an unprecedented economic downturn, which has fundamentally changed our outlook on 2020 compared to when we announced earnings guidance just three months ago. However, as Mark just walked you through our revised guidance for the year, the midpoint of our expectations supports positive year-over-year earnings growth. We believe this is a reflection on the merits of the durability of our corporate profile and business fundamentals and gives us confidence that our organization will successfully navigate through this challenging time period.

So I’ll summarize our priorities in the near-term. We’re prioritizing the health and safety of our team members, continuing to maximize portfolio net operating income, completing and leasing the development pipeline and delivering environmentally responsible facilities, maintaining our very strong balance sheet that comfortably supports our dividend, and lastly, carefully allocating any new capital to best position ourselves for growth over the long-term.

So with that, we’ll now open up our lines to the audience. Since we have got a little long with our introduction and comments, I would ask that participants keep the dialogue to just one question, and you of course are welcome to get back in the queue. Tom, we’ll now take questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today comes from the line of Nick Yulico with Scotiabank. Please go ahead, sir.

Sumit Malhotra — Scotiabank — Analyst

Hey, good morning. This is Sumit in for Nick. Just a quick question on the bad debt and bad debt activity in Q1. I guess, what was the kind of tenant and what type of space are we talking about in terms of sizing and what sort of industry affiliations the tenant had? And potentially if you could highlight the market? And in addition, how quickly were you able to re-lease the space to the tenant? We noticed a small amount of concessions offered. So was this related to the same situation? And in terms of the income — incoming tenant, what’s the industry affiliation there? So just trying to get a sense of who went out and what sort of industry and then who came in and what sort of industry.

James B. Connor — Chairman and Chief Executive Officer

Yeah. Sumit, I’ll take that. There really is no — there is no loss of tenants. This was not a cash rent reserve, it’s all straight line. So it’s not like we lost occupancy and we’re waiting to backfill the space, that’s not what we’re dealing with. We took a very comprehensive review effectively of every tenant in our database. And we looked at it a lot of different ways. We looked at tenants that may have individual bad news recently that’s not favorable for them. We looked at all of the tenants that haven’t paid us April rent, which are a lot of small tenants, as Steve mentioned, most of our deferral request from the tenants that haven’t paid us rent yet are small tenants in nature.

So we sort of grouped all those tenants together and we put up a reserve for the bad debt on the straight line piece. We looked at tenants in higher risk industries that are more heavily impacted by COVID. Right now those industries be industries like automotive and related airlines, hospitality, travel, event planning, recreation. In total, those industries are exposure. There is really only about 5%, but we did put up a reserve on that group of tenants straight line receivable balance.

So you got to keep in mind, the straight line receivable balance is $130 million on our balance sheet. It’s been built up overtime through free rent, sometimes years ago that was given to some of these tenants, rent escalators. So it’s not about current cash rents. It’s about straight line revenues that we’ve recognized in past years that we reserve for the first quarter.

So it’s not a occupancy issue, it’s not like we lost tenants. As Steve mentioned, our cash that we’re collecting is very good right now. We just thought at this point in time given everything going on the world, if we were comfortable with the reserve on that $130 million at year end, given everything going on in the world, it seem prudent that we ought to be increasing our reserve right now.

Sumit Malhotra — Scotiabank — Analyst

Mark, I mean — sorry if I misunderstood, but wasn’t there backfill in the quarter?

Mark A. Denien — Executive Vice President and Chief Financial Officer

Well, I would say that we renewed about 79% when you include backfills and tenants that expired. Backfills represented about 11% of the 79%.

James B. Connor — Chairman and Chief Executive Officer

Yeah, that’s not — that had nothing to do with the bad debt we took. That’s just — we got…

Sumit Malhotra — Scotiabank — Analyst

Okay.

James B. Connor — Chairman and Chief Executive Officer

That has nothing to do with the bad debt.

Sumit Malhotra — Scotiabank — Analyst

Understood. Thanks. Okay.

Operator

Our next question comes from Mike Mueller. Please go ahead.

Michael Mueller — J.P. Morgan — Analyst

Yeah, hi. A quick question. On the 250 basis point occupancy decline that you have baked into the second half of the year, are you assuming that all takes place on July 1 or is it more of a slow bleed throughout the second half of the year? I’m just asking because I’m trying to think about the 2021 carryover.

James B. Connor — Chairman and Chief Executive Officer

Yeah. Mike, we didn’t necessarily look at that way. It is an average number. So I guess, on average, you could really kind of think of it like it happens on July 1. The reality is, it will probably start to slowly happen before then, and an increase, probably early in the second half of the year. But on average, I think that July 1 is kind of the way we modeled it right now.

Michael Mueller — J.P. Morgan — Analyst

Got it. Okay. Thank you.

Operator

And we have a question from Jamie Feldman representing Bank of America. Please go ahead. Mr. Feldman, would you please press the command again, 1-0. Okay. Your line is now open, sir.

Jamie Feldman — Bank of America Merrill Lynch — Analyst

Great. Can you hear me?

James B. Connor — Chairman and Chief Executive Officer

Yeah. We can hear you, Jamie.

Jamie Feldman — Bank of America Merrill Lynch — Analyst

Thanks. I wanted to go back to Steve’s comments on emergency inventory, your inventory restocking and just kind of what tenants are thinking over the long-term. Can you guys maybe quantify what your average tenant is thinking in terms of the incremental demand picture when we do get through this and things get a little bit back to normal? Just trying to kind of get a sense of what the world does look like in a year or so?

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Sure, Jamie. I guess, I’ll make two points. One is, probably no other time than the last 30 days that we had more access and conversations with our customer base than we do today. We’re talking to every one of our customers and having conversations from the CEO down to the real estate directors. Secondly, I think there’s been a lot of talk on resiliency and safety stock. A lot of it has been anecdotal. Our customers are beginning to talk about that. I can’t say that right now we have specifics on what that percentage of increase in inventory is going to be or where that’s going to be or who is going to affect. We don’t have any specifics on that yet.

James B. Connor — Chairman and Chief Executive Officer

So Jamie, I would add. This is part of the larger discussion, which has been ongoing and I think is going to accelerate, which goes all the way back to the ensuring of jobs in manufacturing and assembly that has been talked about for the last couple of years. So I think you’ll see many companies begin to put plans in place over the next couple of years to continue to bring more of that responsibility back into the U.S. and more of that inventory into their existing supply chain here in the U.S. so they can access quicker.

Jamie Feldman — Bank of America Merrill Lynch — Analyst

Okay. And maybe like what percentage of your tenant base would you say is considering that or talking about that?

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Probably 25% of the people we’ve talked to so far.

Jamie Feldman — Bank of America Merrill Lynch — Analyst

Okay, all right. Thank you.

Steven W. Schnur — Executive Vice President and Chief Operating Officer

It’s an evolving situation, Jamie.

Operator

Next we’ll go to line of Jeremy Metz representing BMO. Please go ahead.

Jeremy Metz — BMO Capital Markets — Analyst

Hey, thanks guys. Mark, you ran through a lot of great math on the embedded protection in your past hour. Your April collections were strong. You only expect a grand total of deferral requests here, but you also got the $200 million on the line to boost your cash position. I get the idea, you’re building a little bit of protection. I’m wondering if you could just give us a little color along those same lines, doesn’t have to be as deep, though I’d love it if it was, but just color on that rainy day thoughts you built in here to decide that that was an appropriate amount of cushion to have? Thanks.

Mark A. Denien — Executive Vice President and Chief Financial Officer

Yeah. Sure, Jeremy. Well, a couple of things I would say. Number one, when we borrow that money, we knew that would get us comfortably through this year and well into next year, funding everything we have in front of us, including our development pipeline if there were no other capital sources available. That was in kind of mid-to-late March. That’s at a time where companies were not accessing the debt markets and the companies that were accessing the debt markets were A-rated companies with interest rates on 10-year money pushing 6%. So that’s when we did it.

Would we do it today? I’m not sure. We’re comfortable with that cash as we sit here now. We’re going to slowly burn through that and fund our development. Certainly the capital markets are available to us and our open. We believe we can do 10-year money now well below 3%. So I don’t know that it will be on our balance sheet for the long-term. But I just — I think it’s important to keep perspective on when we did it, not just that it’s sitting there right now.

Jeremy Metz — BMO Capital Markets — Analyst

Thanks, Mark.

Operator

Our next question is from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck — Wells Fargo Securities — Analyst

Great, thanks. Good afternoon. Jim or Steve, I know this is probably a really tough question to give a definitive answer to at this point, but how do you think this crisis ultimately effects rent growth nationally this year? I think people were probably expecting something like mid-single-digit rent growth pre-COVID. Is that now flat or do you think it turns negative in the near-term? And do you think that differs with respect to different building sizes or any specific markets to the positive or negative?

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Yeah. Blaine, I’ll answer the question and Jim will chime in if I’m sure if he disagrees with me. So I will tell you, in the first quarter I think we were very pleased with our success in the first quarter. I do think it’s a fluid situation. I think it varies by submarket, as we’ve highlighted in the past. We do not have a lot of rollover in our portfolio, which I think we view as a very positive thing right now. But I think in the rollover we have, we’ll still do very well in the rent growth.

I think some of the softer markets we’ve outlined in the past, submarkets in particular, will probably experience some flat if not negative rent growth. Houston would be one area that I’d point out as a pretty soft market right now. But I think at the end of the day, our metrics on the volume of leasing we do throughout the year, we’ll be pretty happy with that.

James B. Connor — Chairman and Chief Executive Officer

Yeah. Blaine, the only thing I would add is, I think our confidence in continued positive rent growth is reflected in our revised guidance. If we thought the world was going to seriously deteriorate to where we were negative in the second half of the year, I think you’d see our numbers at or below zero, and they’re not. So I think that gives you a pretty good understanding of what we think we’re going to be able to achieve for the rest of the year.

And then there is a number of scenarios out there. But as Steve alluded to earlier, the new spec supply has virtually ground to a halt. And thank goodness, everybody still remembers 2008 and was able to turn off the spigot pretty quickly. So once the $140 million that’s under construction gets delivered, that’s virtually it. So 2021 isn’t going to look nearly as bad as I think a lot of people has originally thought because there still is demand out there and there is no new supply coming in behind that. So you could see some reasonable scenarios with just modest demand in the second half of the year where 2021 is very balanced and very healthy.

Blaine Heck — Wells Fargo Securities — Analyst

Great, helpful. Thanks.

Operator

And we have a question from the line of Dave Rodgers with Baird. Please go ahead. Mr. Baird, we can’t hear you.

James B. Connor — Chairman and Chief Executive Officer

There it is. Go ahead, Dave.

Dave Rodgers — Robert W. Baird & Co. — Analyst

Can you guys hear me?

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Yeah, we can.

Dave Rodgers — Robert W. Baird & Co. — Analyst

Sorry about that. I guess on development, I don’t know how much of the question you heard, but you cancelled a couple of deals or walked away. It looked like maybe in the quarter of a couple of land parcels, but you did talk about some really good demand on the build-to-suit side. So I guess maybe some additional thoughts would be helpful around build-to-suits in terms of where you think yields go in light of your — just your comments you made to the last question. Is there a cap on how much you’re willing to do on the build-to-suit side if you can really accelerate that and then those land parcels as well? Thanks.

James B. Connor — Chairman and Chief Executive Officer

Well, Dave, I think Steve and I will tag team this. I’ll start off. We did walk away from three fairly large land sites in the first quarter. Our total write-off there was something in the range of about $4.8 million. And while that’s a lot of money to walk away from, you have to remember that the overall purchase price for those three parcels was $54 million. And the cost to go vertical on those three sites was another $88 million, I believe. So given that we suspended speculative development, we didn’t have build-to-suits pending on any of those. We thought that was prudent because we’ve got, as you saw, plenty of land in our current inventory that’s entitled or we’re working our way through the entitlement process to meet that build-to-suit demand. And we do have some land in the budget for purchase throughout the remainder of the year, but we just thought it’s prudent to step away from those. Steve, you can add some more color.

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Dave, I’ll just add that I think on the build-to-suit side, I think you’ll see us do as many of those as we can get with good credit customers. Our pipeline on build-to-suits, I’ve talked about this in the past, that’s a metric that we track pretty closely because we think it’s an indication of the health of the environment and our customers. That pipeline for us is probably down about 30% today over what it was maybe 45 days to 60 days ago, but it’s still pretty healthy. And it’s e-commerce, food and beverage, household supplies, some consumer goods. So we’re active in that. I think that’s a piece of our business that we’re hopeful as the year goes on that we’re able to outperform on.

Dave Rodgers — Robert W. Baird & Co. — Analyst

And the other part of that was just any change in yield or expectations around construction costs?

Steven W. Schnur — Executive Vice President and Chief Operating Officer

No, I wouldn’t — I don’t think so. I mean there has been some discussion I covered in my comments about some work stoppages in different areas that seems for the most part to be behind us. And I don’t see any increase in cost. I mean, I think, we’ll see competition like we always do, but we’ve got some good assets, some good land sites. And I think our yields will be consistent with what we’ve done in the past in our margins.

Dave Rodgers — Robert W. Baird & Co. — Analyst

Great. Thank you.

Operator

Next is a question from Manny Korchman with Citi. Please go ahead.

Emmanuel Korchman — Citi — Analyst

Hi. Good afternoon, everyone. Maybe follow-up to the last couple of questions in terms of tenant psychology with fewer spec sites out there and you and peers talking more about build-to-suit. Do you think the tenant sort of get it or what does it take them to understand that if they want to be in the building they now have to go and track down the developer into that committed build-to-suit that’s six months or nine months or 12 months rather than shop around in a market once those spaces are available?

James B. Connor — Chairman and Chief Executive Officer

Yeah. Manny, I think it’s a little early to make the call in terms of how people have really fundamentally changed their outlook. We still have 6 million square feet of first generation space available in our portfolio, and many of our peers do as well. So I think what you’ve got is a situation, as Steve alluded to, a number of these users who are looking at what we’re going through today as a shorter term scenario that this is not going to affect their longer term business or if it is, it’s going to affect it in the case of e-commerce or food and beverage, it’s going to affect in a positive way. And they are choosing to go to build-to-suit route so that they could get exactly what they want, where they want, when they want it.

And as you know, many of these e-commerce facilities and many of the food and beverage facilities are substantially different than your traditional off-the-shelf spec building. So that’s why, although Steve said, demand is down, we’ve still got a pretty good pipeline. And I think we’ve always said, that’s a real indication of the outlook that our major clients are taking for the next 12 months to 24 months. And I think a lot of companies believe we’ll work our way through this in the short-term. And in 2021 and 2022 we’ll all obviously be in a better place and they need to have facilities to support that business.

Emmanuel Korchman — Citi — Analyst

Thanks, Jim.

Operator

And we’ll go to Rich Anderson’s line with SMBC. Please go ahead.

Richard C. Anderson — SMBC Nikko Securities — Analyst

Good afternoon. So I will go back and listen to Mark’s comments, I don’t have my court stenographer here with me, but there’s no doubt. What I did catch was the 210 basis points, 60 basis points of that taken in the first quarter, and I know, non-cash reserve straight line rent, but that was a kind of a pre-COVID or sort of preliminary COVID sort of exercise. And I’m curious what gives you the confidence that that will stand the test of time as we go forward? And also in light of the fact that the 210 basis points in guidance today compares to 360 from 2019. It just feels like that 210 is a starting point to me? And correct me if I’m wrong in thinking of it that way.

Mark A. Denien — Executive Vice President and Chief Financial Officer

Well, maybe a little bit. First of all, Rich, it was no fun for me to read six pages of script either. So I apologize for that. And we thought it was important to try to get all that data out there because I’ve had a lot of questions.

Richard C. Anderson — SMBC Nikko Securities — Analyst

No problem. No problem.

Mark A. Denien — Executive Vice President and Chief Financial Officer

So let me just — there is a couple of things I would say. The 210 basis points, keep in mind, I said 70 of that is really just delayed lease-up timing from currently available space. So you take the 210 and it really drops down to 140 basis points when you’re talking about bad debt defaults, whatever you want to call that. But I would say it a little differently. It was — the 60 basis points of that that we already took in Q1 for straight line was not a pre-COVID exercise. This was done effectively from the end of March through like last week based on the current environment and everything going on in our world right now.

So a lot of the reserves that we took, most all of it are on tenants that are current on our actual cash rents. Like I say, this is the build up of several years of an asset on our balance sheet, that $130 million from rent escalations and free rent back in the day and all that. And as we look forward, that $130 million burns off over the remaining lease term of all those tenants. And on average, our remaining lease term is 5.9 years. So kind of the way we thought about it as we sit here over the last month scrubbing all of this, we’re like we got to look out over the next 5.9 years on average and think about are we going to get all of this $130 million back in. So it was very much a post-COVID exercise, they got booked at March 31.

Richard C. Anderson — SMBC Nikko Securities — Analyst

Okay. And how would you — I’m sorry, just a follow-up. The 2010 versus the 360 from last year in its totality, does that going to make you wonder if you’ve done enough of a dig? I guess the bigger question is, what is your expectation about when business starts to get back to business, what are your underlying thoughts?

Mark A. Denien — Executive Vice President and Chief Financial Officer

No, I forgot to answer that part of your question. Yeah, the 316 was 2009, okay?

Richard C. Anderson — SMBC Nikko Securities — Analyst

I thought you said, ’19, excuse me. Okay.

Mark A. Denien — Executive Vice President and Chief Financial Officer

I’m sorry. Maybe I did. If I did, I’m sorry. I meant 2009.

Richard C. Anderson — SMBC Nikko Securities — Analyst

Okay.

Mark A. Denien — Executive Vice President and Chief Financial Officer

And my point is, so that’s as bad as it ever got was 360. And we have a much better portfolio and much better tenant base this time around.

Richard C. Anderson — SMBC Nikko Securities — Analyst

You probably said 2009, my bad. Thanks very much.

Mark A. Denien — Executive Vice President and Chief Financial Officer

Yeah. No problem.

Operator

And next is a question from Ki Bin Kim with SunTrust. Please go ahead.

Ki Bin Kim — SunTrust Robinson Humphrey — Analyst

Thanks. The 250 basis points occupancy decline for the second half, how much of that is tied to specific tenants versus just a general conservativeness that you’re taking?

James B. Connor — Chairman and Chief Executive Officer

Ki Bin, very little I would say is tied to specific tenants, like on a one-off basis. But what it is tied to, like I said, we kind of try to match up the occupancy piece with the dollar piece, if you will. So when we looked at like some of these more troubled industries and we put up a generic or a general reserve on a portion of that. So I mentioned like automotive, airlines, hospitality travel, event planning, all that, we really put it up for that population of tenants, if you will. There were a few tenants here and there, but for the most part, it was more around industries and groups of tenants like the smaller tenants that still owe us April rent. It was done more in that vein than it was one-off tenants. There were a few tenants one-off, but not many.

Ki Bin Kim — SunTrust Robinson Humphrey — Analyst

Okay. If I could squeeze a quick second question here. What is the risk that some of the G&A tied to your development that is currently capitalized and some of it’s offset because you’re doing third-party development that you call general contractors service revenue. So what’s the risk at G&A that’s capitalized comes onto the income statement?

Mark A. Denien — Executive Vice President and Chief Financial Officer

Yeah. So I mean that’s — we did not revised our G&A guidance and we factored that in. So what you really have is you have two offsetting things happen. We’re reducing overhead costs. We are reducing our overall costs. Some of that’s very easy. It’s easy to reduce travel and entertainment cost right now, and that’s a big part of what we do. So we’re reducing travel costs, we’re reducing some compensation costs, revised metrics we’re at, bonuses won’t be the same this year as last year. So we’re reducing our overall pool of costs. And offsetting that decrease is a decrease in the absorption we’re going to have from decreased development. And that’s why we left our G&A flat as you’ve got two things offsetting each other.

Ki Bin Kim — SunTrust Robinson Humphrey — Analyst

Okay. Thank you.

Operator

We have a question from the line of Michael Carroll representing RBC Capital. Please go ahead.

Michael Carroll — RBC Capital Markets — Analyst

Yeah, thanks. Mark, I wanted to dive back into your revenue assumptions just real quick. And I know there’s a lot of moving parts in those numbers that you said in your prepared remarks. But that 70 basis points related to delayed lease-up assumptions, that’s just spec leasing that you had in your prior guidance that you’re taking out? And is that really related to the completed developments or is that just vacant space that’s in the current portfolio?

Mark A. Denien — Executive Vice President and Chief Financial Officer

It’s both, Michael. It’s currently available space and — which a lot of that currently available space is spec space, but it’s not all spec space, but most of it is. And then it’s our spec space scheduled to come online yet this year. We pushed back some of those leasing assumptions. We always underwrite a year to lease some up in our underwriting. But when we came out with our budget and things and at the beginning of the year, we thought we could beat that because we have been beating it, we’ve been leasing things up more like nine months. Now we’re taking more of that one year approach.

So we pushed back some spec leasing, that’s not in the population yet. We pushed back some leasing on empty space that’s in the population now, most of which was spec that was been delivered over the last two quarters or three quarters, and then some of just the older second generation spaces currently. So little bit of everything, but it’s mainly spec space.

Michael Carroll — RBC Capital Markets — Analyst

Okay. Thanks.

Operator

And we will go to Vikram Malhotra’s line with Morgan Stanley. Please go ahead.

Vikram Malhotra — Morgan Stanley — Analyst

Thanks. Just two quick questions. So first, thanks for clarifying the 210 being all encompassing including bad debt. I just sort of want to go back to the comparison of that versus the 2009 recession. I recognize the portfolio is different quality-wise, but can you maybe talk about may be differences in the customer tenant make-up of the two portfolios and sort of what gives you confidence that it’s likely to be less impactful? So that’s the first question. I’ll just say the second. The 22% rent collection in May, definitely very interesting, can you just give us a sense of historically kind of towards the end of the month what collections have you done for the following month?

James B. Connor — Chairman and Chief Executive Officer

Yeah. I mean, I think the reason we have — I’ll just say it generically, I guess. The reason why we’re much better off in this cycle than the last cycle, few reasons. One, we’re in better markets. Two, we have just better tenants, better credit quality tenants. And three, we have a much smaller population of small space with local credit. If you go back to 2009, we had a lot of small space spread across our system, a lot of which was in non-coastal high-barrier markets. Generally where our small space is now are in places like South Florida, that’s not where our small spaces before that. So for all those reasons, that’s why we’re highly confident our portfolio will perform much better this time.

And then your other comment on the May collections. You know, that’s as of yesterday, which was 29. That’s probably a little bit behind where we would normally be, but prepaid rent can vary quite greatly honestly from month to month. We were just — we’re happy to see that tenants are still paying us early. So I would tell you that if I had to guess, I haven’t seen any cash rents for today yet. We may be just a little bit behind normal, but probably not a lot.

Operator

You still with us Vikram?

James B. Connor — Chairman and Chief Executive Officer

I think that’s it.

Vikram Malhotra — Morgan Stanley — Analyst

Thank you. Thank you.

Operator

Okay. Next we’ll go to John Guinee with Stifel. [Operator Instructions] Please go ahead, Mr. Guinee.

John Guinee — Stifel Nicolaus & Co. — Analyst

Great. Thank you. I just noticed on your overall portfolio data for lease-up, Northern California, Southern California and Pennsylvania all appear to be below 85%. Any rhyme or reason to those markets lagging?

James B. Connor — Chairman and Chief Executive Officer

I’m going to get where you’re at, John. What page are you on in the supplemental?

John Guinee — Stifel Nicolaus & Co. — Analyst

I’m not on it anymore. It’s the far right column on the page talks about higher portfolio. And I was sort of surprised to see Northern and Southern California sub-85% as well occupied as well Pennsylvania sub-85%?

James B. Connor — Chairman and Chief Executive Officer

Okay. Well, let me — I can comment on a couple. Southern California is actually 98.1%. The far right column includes the underdevelopment, which has the spec projects in it. So the actual in-service is 98%. The Northern California is just one building, we’re at 90% on our in-service. And then the other building is under construction. So no issues on either of those. And in Pennsylvania, we have one spec building that we delivered just over a year ago and we still got to get leased up. It’s on the west side of the Lehigh Valley. How many zones, Steve?

Steven W. Schnur — Executive Vice President and Chief Operating Officer

830 zones.

James B. Connor — Chairman and Chief Executive Officer

Yeah. So that’s a big drag on that is really one building. We have prospects looking at it, but we just got to get that one leased.

John Guinee — Stifel Nicolaus & Co. — Analyst

Great. Good luck. Thanks guys.

James B. Connor — Chairman and Chief Executive Officer

Thanks, John.

Operator

And we will go to Eric Frankel line with Green Street Advisors. Please go ahead.

Eric Frankel — Green Street Advisors — Analyst

Thank you for taking my question. I know it’s very early, and as you guys remark, the capital markets is kind of in all over the place the last couple of months. But maybe you could just talk about what you’re seeing real time in terms of pricing on assets and sales?

Nick Anthony — Executive Vice President and Chief Investment Officer

Yeah. Eric, this is Nick. You know, most of the market participants have put things on hold. I would tell you that there are some core long-term lease deals that appear to be going under agreement at about 4% to 5% pre-COVID discounts. And then any type of multi-tenure value-add type stuff. People are just taking a wait and see approach, waiting to see some data points in terms of rents and trades before they start going back into the market.

Eric Frankel — Green Street Advisors — Analyst

Okay. Thank you for the color.

Operator

And we have a question from Jamie Feldman with Bank of America. Your line is open.

Jamie Feldman — Bank of America Merrill Lynch — Analyst

Just a quick follow-up. I know you guys had mentioned the public REITs have pretty much stopped their speculative development pipelines. I’m just curious what you guys are seeing from the private market in terms of supply and talk of supply?

Steven W. Schnur — Executive Vice President and Chief Operating Officer

Sure, Jamie. I think the private side is holding back as well whether that’s their decision or their capital stack. But we’ve seen the private side hold back as well. So I think — I guess, as Jim indicated, I think you’ll see a healthier supply pipeline as we get into ’21 because of that. I mean, I think we all learned our lessons 10 years ago.

Jamie Feldman — Bank of America Merrill Lynch — Analyst

Okay. Thank you.

Operator

Gentlemen, there are no further questions at this time.

James B. Connor — Chairman and Chief Executive Officer

Thanks, Tom. I’d like to thank everyone for joining the call today. Look forward to engaging with many of you throughout the rest of the year. Operator, you may disconnect the line.

Operator

[Operator Closing Remarks]