First Industrial Realty Trust Inc

NYSE:FR

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the First Industrial Second Quarter Results Call. [Operator Instructions]

I would now like to hand the conference over to Art Harmon, Vice President of Investor Relations and Marketing. Thank you. Please go ahead, sir.

[Arthur Harmon, Vice President, Investor Relations and Marketing]

Thanks a lot, Shelby. Hello, everybody, and welcome to our call. Before we discuss our second quarter 2020 results and updated guidance, let me remind everyone that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time-sensitive and accurate only as of today's date, Thursday, July 23, 2020. We assume no obligation to update our statements or the other information we provide.

Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab.

Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we will open it up for your questions. Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.

Now let me turn the call over to Peter.

[Peter Baccile, President and Chief Executive Officer]

Thanks, Art, and thank you all for joining us today. I hope that you and yours are maintaining your health as we all work through these challenging times. Before we discuss the quarter, we would like to express our gratitude and bid farewell to an important member of the First Industrial family. As we previously disclosed, Bruce Duncan has retired from our Board. As many of you know, Bruce has taken on a new challenge as CEO of another REIT. Bruce joined First Industrial as our CEO in 2009 during a difficult period and provided tremendous leadership to help stabilize and transform our business model and portfolio. We wish Bruce well in his new role.

As you may also have seen, seasoned FR Director, Matt Dominski, has taken over as Chairperson. Matt has been a highly productive member of our Board since 2010. We are thrilled to have Matt as our new Chair and look forward to his continued counsel and leadership.

Moving now to the quarter. We produced strong results demonstrated in several different areas, including collections, leasing, investment and capital markets. Our regional teams have done a fantastic job in the second quarter on collections. I would like to thank them for their continued diligence in working with our tenants through these difficult times. As of yesterday, we have collected 98% of 2Q monthly rental billings and so far, we've collected 97% of July billings, which is ahead of the pace we experienced in the second quarter. If we include collections from government-related tenants that regularly pay at the end of the month, our collection rate for July would also be 98%.

About 65% of the outstanding monthly rental billings in the second quarter were in jurisdictions that have moratoriums on the landlord's right to evict, which we believe, are a contributing factor toward the open receivables for this group. To be clear, in our calculation of this collections percentage metric, the numerator reflects cash collections and we do not give ourselves credit under our methodology for the application of security deposit. In addition, the denominator reflects the total monthly rental billings and is not reduced for any reserves for bad debt expense or rent deferrals.

Including surrendered security deposits and bad debt reserves recognized in the second quarter, our outstanding accounts receivable related to our monthly rental billings in 2Q is only $550,000. Rent relief requests have tapered off to a minimum. During the COVID-19 crisis to-date, we have established rent deferment agreements with 14 tenants totaling $750,000 or about 18 basis points of annualized billings. The average term for these deferrals is 1.3 months.

It appears the government stimulus has helped a number of our customers and business leaders in general are more optimistic about their prospects. The industrial business continues to perform well as commerce continues to flow through logistics facility. As you've seen, economic activity has improved since March and April and our customers and prospects are moving ahead with new space requirements albeit with caution, in some cases.

In its second quarter preliminary flash report, CBRE reported 19 million square feet of net absorption versus 56 million square feet of completion. These figures should not be a surprise given the economic slowdown attributable to COVID and the resulting drop in Q2 leasing activity. However, we are optimistic about our long term prospects given the acceleration of e-commerce adoption and the potential for additional safety stock, generating incremental demand for logistics space. This view is supported by CBRE's recent forecast that annual net industrial absorption will total more than 333 million square feet by 2022. If they are right, net absorption for the sector will exceed the high watermark, post a great financial crisis of 324 million square feet in 2016 and the all-time mark of 329 million square feet in 2000.

Despite completions exceeding net absorption nationally in the quarter, our portfolio occupancy increased to 97.7% at quarter-end. We also achieved a big leasing win at our Nottingham Ridge Logistics Center in the I-95 North submarket in Baltimore. We leased 100% of the 585,000 square foot Building A to a leading e-commerce provider on a long term basis, which commenced in late June. Considering we purchased this asset in the first quarter, we leased this property significantly ahead of the 12-month lease-up budgeted in our guidance. With just 54,000 square feet remaining to lease, we are now 93% occupied at this 751,000 square foot two-building project.

Looking more closely at our portfolio performance. As of July 22nd, we have signed 83% of our 2020 lease expirations at a cash rental rate increase of 8.6%. For the full year, we expect our cash rental rate change on new and renewal leasing to be approximately 10%. The investment market has begun to awaken after a fairly quiet period in which we saw the bid-ask spread widen a bit. Most offerings had been shelved as participants saw more clarity on the direction of the economy and asset values. The federal government stimulus actions certainly helped to quell some of those concerns and based on what we are seeing and hearing; pricing has returned to pre-COVID levels and in some cases is higher.

We were able to make a few acquisitions during the quarter in some high barrier markets. We acquired a 39,000 square-footer in Fremont in Northern California and added an adjacent building comprised of 46,000 square feet. The aggregate purchase price was $17.8 million with a weighted average initial yield of approximately 4.6%. We also added a 9.7-acre covered land investment in the Inland Empire for $3.5 million. The site has a 3% in-place yield for the next several years, generating some cash for us as we entitled the site. The site will accommodate a 155,000 square foot development.

Thus far in the third quarter, we have closed on a 6.6-acre site in Seattle for $6.1 million that can accommodate a 129,000 square foot building. We are also excited to launch a new build-to-suit development at our First Nandina II site in the Inland Empire. The building will be 221,000 square feet and it's leased on a long term basis to a manufacturer of material handling systems. Total investment is $22.4 million and the initial cash yield will be approximately 6.2%. We are proceeding with all of our developments in process, which totaled 1 million square feet and a total investment of $94.7 million at June 30th.

In addition to our on-balance sheet developments, construction on the 643,000 square foot spec building in our Phoenix joint venture at PV303 is progressing well. Our portion of the investment is $21 million and our targeted yield is 7%. Our on-balance sheet land holdings will accommodate approximately 13 million square feet of future developments, the vast majority of which is entitled and ready to go. We continue to move ahead on infrastructure work at several sites so that we are prepared to launch when we think economic conditions in the specific submarkets justify new starts.

Moving to dispositions. In the second quarter, we sold three buildings totaling 211,000 square feet for $14.6 million. These were comprised of a building in Detroit, one in Chicago and our last asset in Indianapolis. Year-to-date, we sold 437,000 square feet for a total of $41.1 million. As a reminder, in the third quarter, we expect to close on the $55 million sale in Phoenix, in which the tenant exercised its purchase option in 2019.

Moving to our recent capital markets activity. On July 7th, we entered into a private placement agreement to issue $300 million in total of 10 and 12 year notes with a weighted average interest rate of 2.81%. On July 15th, we closed on an extension of our term loan that was scheduled to mature in January of 2021. These two executions provide us additional capital for new investment and lengthen our maturity schedule. So all in all, a successful and very busy quarter with great execution by our team.

With that, let me turn it over to Scott.

[Scott Musil, Chief Financial Officer]

Thanks Peter. I will begin with our EPS and FFO for the second quarter. Diluted EPS was $0.28 versus $0.31 one year-ago and NAREIT funds from operations were $0.46 per fully diluted share compared to $0.43 per share in 2Q 2019. Second quarter 2020 FFO includes approximately $500,000 of cash bad debt expense related to tenant accounts receivable and $400,000 of non-cash bad debt expense related to the write-off of certain deferred rent receivables.

Pier 1 has paid July rents and we are assuming they pay August rent, which in total represents a $500,000 pick up from our prior guidance. Occupancy was strong at 97.7%, up 60 basis points from the prior quarter and up 40 basis points from a year-ago.

As for leasing volume during the quarter, we commenced approximately 2.9 million square feet of leases, 600,000 were new, 1.6 million were renewals and 700,000 were for developments and acquisitions with lease-up.

Tenant retention by square footage was 88.7%. Same-store NOI growth on a cash basis, excluding termination fees, was 6.3% helped by increase in rental rates on new and renewal leasing, a decrease in free rent and rental rate bumps embedded in our leases. This was partially offset by increase in bad debt expense and slightly lower average occupancy. Cash rental rates were up 11% overall with renewals up 8.9% and new leasing 16.7%. And on a straight-line basis, overall rental rates were up 32.4% with renewals increasing 30.6% and new leasing up 37.5%.

As Peter mentioned, we executed on two capital market transactions in the third quarter that extend and ladder our maturities at attractive rates. First, we entered into an agreement to issue $300 million of fixed rate senior unsecured notes in a private placement offering. The notes are comprised of two tranches, $100 million with a 10-year term at a rate of 2.74% and $200 million with a 12-year term at a rate of 2.84%. We expect to close on the offering on or about September 17th of this year. On an interim basis, we will use these funds to pay down our line of credit, which will give us more liquidity to fund new investment and a secured debt maturity in 2021.

We also refinanced our $200 million unsecured term loan, previously scheduled to mature at the end of January 2021. The new loan has an initial maturity date of July 2021, which we can push to July 2023 via two one-year extensions exercisable at our option. The loan features interest-only payments and bears an interest rate of LIBOR plus 150 basis points. In conjunction with the new term loan, we entered into new interest rate swap agreements that convert the loan to a fixed interest rate of 2.49%, beginning in February 2021. In 2021, we will realize about a penny per share of savings due to this refinancing.

After these two executions, one of our remaining 2021 maturities is the aforementioned $63 million of secure debt in the fourth quarter. We can pay that off using our line, which will have additional capacity created by the proceeds from our private placement offering. The other is our line of credit, which matures in October of 2021, but we can push that out another year through a one-year extension exercisable at our option. Our leverage is also in good shape with our net debt plus preferred stock to EBITDA at 5.2 times at January -- at June 30th.

Moving on to our guidance per our press release last evening. Our guidance range for NAREIT FFO and FFO before one-time items is now $1.76 to $1.84 per share with a midpoint of $1.80. This is an increase of $0.02 per share compared to the midpoint of our guidance on our first quarter call. The increase is primarily due to the early lease up of the 585,000 square foot building at the Nottingham Ridge Logistics Center as well as two months of additional rental income from Pier 1. This is slightly offset by additional interest expense based on our assumption that we use the funds from our private placement offering to pay down our line of credit in the near term. Our assumption for the average -- for the range of average quarter-end occupancy remains 96% to 97% and our cash bad debt expense assumption remains $900,000 for each of the third and fourth quarters. Please note that guidance does not include any potential write-offs of deferred rent receivables related to tenants that are having financial difficulties.

Other key assumptions for guidance are as follows, same-store NOI growth on a cash basis before termination fees of 3.25% to 4.25%, an increase of 25 basis points at the midpoint and a tightening of the range. Our G&A guidance range remains at $31 million to $32 million and guidance also includes the anticipated 2020 costs related to our completed and under construction developments at June 30th, plus the third quarter start of First Nandina II. In total, for the full year 2020, we expect to capitalize about $0.04 per share of interest related to our developments.

Our guidance does not reflect the impact of any other future sales, acquisitions for new development starts after this call other than the expected third quarter sale of the building in Phoenix, for which the tenant exercised its purchase option. The impact of any future debt issuances, debt repurchases or repayments after this call other than the $300 million private placement, I previously discussed which we expect to close on or about September 17th of this year. The impact of any future gain related to the final settlement of one insurance claim from a damaged property. And guidance also excludes the potential issuance of equity.

Let me turn it back over to Peter.

[Peter Baccile, President and Chief Executive Officer]

Thanks, Scott. Before we open it up to questions, let me say that I am incredibly proud of the way our team has performed in this difficult environment and thank them for their dedication to serving our customers well and doing it safely. Our company is built for the long term and we are well positioned to drive cash flow growth for shareholders by serving logistics needs of a range of essential and emerging businesses, while capitalizing on the secular drivers of e-commerce.

With that, we will now move to the question-and-answer portion of our call. We ask that you please limit your questions to one plus a follow-up and then, you are welcome to get back in the queue. Operator, would you please open it up for questions?

[Operator]

[Operator Instructions]

Your first question is from Craig Mailman of KeyBanc Capital Markets.

[Craig Mailman, KeyBanc Capital Markets]

Hey, good morning guys. Peter, just maybe circling back to your reference of the net absorption here in the second quarter versus the new supply. Clearly, a little bit of an imbalance but hopefully, a little bit temporary here. Just with that backdrop though, what are you seeing from tenants and tenant rent brokers in terms of where they think rent levels are? Are they pushing back? Are they asking for more concessions or is it a realization that supply could get choked off here and things could tighten up pretty quick?

[Peter Baccile, President and Chief Executive Officer]

Well, things are a lot different in the last 45 days than they were in the prior few months as you can imagine but it looks now, we do think there is going to be some rent growth, depends on the market, obviously. And in terms of concessions, we're just not seeing anything that's any different than what existed pre the virus. There may be certain areas where there is an oversupply of big boxes. You know that before the virus there were a few markets that had additional supply, so maybe there is some additional concession there but generally speaking, the markets are pretty strong. It's obviously still clearly a landlords' market and so, we are pretty optimistic about our opportunity to grow rents.

[Craig Mailman, KeyBanc Capital Markets]

Okay. And then, just -- you guys had some good execution there on, in Baltimore and the IE but the balance of the development pipeline, understandably, didn't get much leasing done. Just kind of curious where some of those projects stand and what the pipeline looks like.

[Peter Baccile, President and Chief Executive Officer]

Sure. I'll have Jojo and Peter take you through that. I recognize that a lot of that isn't finished yet, but Jojo, you want to go over some of our projects?

[Johannson Yap, Chief Investment Officer]

Sure. So if you look at the projects that were just completed at the end of last year that's in Dallas and Houston. I will start with Houston, a great project there in Katy, West I-10 and State Highway 99, freeway frontage two buildings, love that project. But at this point, I mean, showings there have been limited because of COVID but despite that, we're basically at 15% leased there. Of course, we'll continue to work and improve the leasing there.

In Dallas, there is one in Fort North Worth and Louisville. Louisville is a much tighter market, less supply, a very good market, there is a lot of demographic growth in that market, we love that project as well, is 18%. That market is more open in terms of showings and RFPs, so look forward to announcing more deals there. And what we -- in the First Fossil Creek, that's really a one to two tenant building and we're just looking for the right tenant.

And so, for First Redwood and IE, we just completed a building at the end of last month and we're already getting RFPs, we're well within our 12-month lease-up period, we're getting RFPs and our -- and proposals there. And for the rest of the development, before I turn it over to Peter, for First Independence Logistics on Sawgrass, Redwood and I-21, IE, Dallas, Miami, those projects are still not completed yet. Peter?

[Peter Schultz, Executive Vice President]

Thanks, Jojo. Good morning, Craig, it's Peter Schultz. On our project in Philadelphia, that was really just completed in the last couple of weeks. Pennsylvania, as you may know, had a construction halt for several months, so we're a little bit delayed there, which certainly also impacted inspections and activity but that's a submarket that's very tight with limited supply. And as Peter mentioned, couple of minutes ago, we've definitely seen an increase in activity in the last 30 days broadening across industries and space sizes. Our other project in Central Pennsylvania, as you may recall, was the second of the two-building project there that's 75% leased and in the last 30 days, we've seen a pickup in inquiries, traffic and RFPs there and more activity in the 200,000 square foot plus range than we'd seen in a couple of months. So clearly, work to do and we'll keep you posted on our progress.

[Operator]

Your next question is from Ki Bin Kim of SunTrust.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Good morning out there. When you guys mentioned improving customer dialog, what does that really mean? And can you put a little more details behind that?

[Peter Baccile, President and Chief Executive Officer]

Ki Bin, Peter here. Look, we're -- we have -- as we mentioned, we got very early; we got very close to our tenants on helping them get access to PPP, etc. So the specific action points were to make sure they knew what was available, make sure they knew how to do it and also, try to make sure that they had a banking relationship that would give them access to the application process and receiving funding. That effort that we made, we think has paid off to some degree. Now, we don't know how many of our tenants actually got PPP but we do know about 30 did. And again, we don't know how they invested it, the money they had received either because you can invest about half of it in non-payroll activity.

So -- but having that dialog definitely put us in a good position with the tenants. We've also had some weather issues at certain assets that we've taken care of in terms of flooding, etc., notwithstanding the environment and the difficulty with everything being shut down because of the virus. And so, all of these things are going toward retention, going toward tenant relationships and ultimately, we think drives value for our shareholders in the long run.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Okay. And if you take a step back and if I'm just incorporating everything you're saying now and kind of the improved outlook how does that translate into your willingness for capital allocation, derisk your endeavors like development? And when is the right time to maybe reignite that?

[Peter Baccile, President and Chief Executive Officer]

Yes. So we're evaluating various opportunities. Now first, I'll say, obviously, the Nandina II project's a good example. We're in the business right now, we're in the build-to-suit business, we're responding to RFPs, so we're eager to grow that business. Obviously, our primary source of growth has been and will continue to be speculative development. There are two things that we're focused on in terms of when and how we decide, when and where to go with new projects. One is we'd like to see the great dialog that we're having with a range of tenants on a number of our projects turned into ink lease -- inked leases and when we see that happen, that will give us some confidence that this new activity is sustainable. The second thing we're looking at is what's happening with the virus, what's happening with activities, and policies and protocols that may come down from the leadership of each state and nationally, and will that have enough -- a chilling effect on the economy or will it allow the economy to continue to open albeit perhaps, at a slower pace?

So if we see some sustainability there and some sustainability, as I said, on the tenant activity, that's going to give us, great confidence to go ahead and start putting some shovels in the ground again.

[Operator]

Your next question is from Rob Stevenson of Janney.

[Robert Stevenson, Janney Montgomery Scott]

Hi, guys. Any tenants of size that are likely or known move-outs when looking at the expirations through early 2022 at this point?

[Scott Musil, Chief Financial Officer]

Rob, it's Scott. When you look at the -- we've got going out to 2021, the largest tenant expiration we have is about 477,000 square feet, it's in Atlanta. That lease is coming due in May of next year, so we really haven't gotten far along with the dialog with that tenant. I would say our 2021 lease maturities are very granular from a tenant industry point of view and on a regional point of view.

[Robert Stevenson, Janney Montgomery Scott]

Okay. And then, can you guys talk about demand in the market these days for the non-core assets, do you expect to continue to sell in the back half of the year and is the pricing what you would expect for that and any urgency to get more of this done given the rhetoric on doing away with or limiting 1031 exchanges going forward?

[Johannson Yap, Chief Investment Officer]

First, -- hi, this is Jojo. Well, first, in terms of the sales market, investment market, I mean, of course, everybody knows we kind of hit the pause, March, April and May. But buyers are back for all product types, all across the markets and that's really driven by the pause in the market and they've seen that the industrial business continues to lease space and rents continue to grow. And so, we don't want to expect -- but for the quarter pause for the year, we don't really expect significant change in the sales activity market. What we are hearing is that for sellers -- some sellers pulled back their portfolios, didn't want to take the pricing. March, April and May, the portfolios are back, the pipeline is growing and for us, we see it back to pre-COVID in terms of our sales activity.

For us in terms of strategy, no change in strategy. Portfolio management is a part of our DNA, we will continue to do that, we look at it asset-by-asset and no change, no rush, I mean; it's just really maximizing value, like Peter said in prior calls.

[Robert Stevenson, Janney Montgomery Scott]

And how much of that is going to be driven by what you guys do on spec development and need to spend on the development pipeline? If you guys continue to have a lower development pipeline, does that mean that you're unlikely to sell as much in the back half of the year to fund construction cost in the early part or the end of the year or early 2021?

[Peter Baccile, President and Chief Executive Officer]

No. Those two decisions, they are not connected. We really want to maximize the value of both outcomes so if it's time, quite often what drives our decisions with sales is there may be a leasing opportunity in a particular asset, which we may hold off the market until we lease it up, but that all goes toward maximizing the value of that asset. That won't have anything to do with whether we think it's time to start a new development in a given high barrier market, those are two different decisions.

[Operator]

Your next question is from Michael Carroll of RBC Capital Markets.

[Michael Carroll, RBC Capital Markets]

Yes, thanks. Can you provide some color on, I guess, the small amount of uncollected rents that you have to-date? I guess, are there any themes within that bucket, I guess, outside of that majority of the assets are located in jurisdictions that have restricted evictions, I mean, are these tenants concentrated in any certain sectors or anything like that?

[Peter Baccile, President and Chief Executive Officer]

I guess, I would say that the overall theme is that any business that -- whose revenues depend upon the congregation of people such as tent rental companies, health club or sporting goods or fitness kind of businesses, businesses that serve restaurant supply, entertainment, those are the kinds of businesses, health clubs, of course, those are the kinds of businesses that have been doing not so well the last quarter or so, but other than that, it's not so bad.

[Michael Carroll, RBC Capital Markets]

Okay. So then within, I guess, the 2% of uncollected buckets that you guys highlighted in 2Q and basically, through July right now, I mean, have -- what have those tenants been saying? Have you been talking to them, I mean, what's their sentiment like and when if you were able to lever those evictions, are they going to start paying or is -- are they -- you're just going to get lower occupancy and try to lease that space back up?

[Peter Baccile, President and Chief Executive Officer]

Well, obviously, those that are behaving poorly, we're going to have further conversations with them but I would say that, of that 2%, some will become bad debt, some will be collected, some may be deferred, and it's hard to say right now. We're just happy it's a very small number and we're happy that our tenants overall are doing well and able to pay their rent.

[Johannson Yap, Chief Investment Officer]

And in some cases, there will be a negotiated move out, because we have a number of cases where the in-place rents are well, well below market.

[Peter Baccile, President and Chief Executive Officer]

Yes. When we have tenants who are doing well where we know we can raise the rent, we'll be very active around swapping that out.

[Operator]

Your next question comes from Eric Frankel of Green Street Advisors.

[Eric Frankel, Green Street Advisors]

Thank you. Just going back to your dispositions, do you still feel pretty good about your overall goal and have you seen pricing change at all or do you think your pricing is changing for the assets you want to sell?

[Peter Baccile, President and Chief Executive Officer]

From a timing standpoint, Eric, as you know, most of our sales are typically back ended, so having to take a pause in the second quarter didn't really disrupt our plans. So we're pretty -- and seeing the activity now and the buyers come back to the market and the conversations that we're now having, they seem pretty solid. So we still have a pretty optimistic outlook for the balance of the year on sales and we think we'll be in that guidance range.

[Eric Frankel, Green Street Advisors]

Okay. Thanks. And just going back to your leasing results. So I guess you mentioned your 2020 -- of your 2020 role of your cash and releasing spread were around 8.5% or so. It's still a little bit lower than what you recorded in the first two quarters. So, I know you mentioned that you expected overall or annual cash releasing spread to be around 10%, are there anything to read into that slight dip during July or are that just or not -- is that just the timing of certain leases?

[Peter Baccile, President and Chief Executive Officer]

Chris, you want to take that?

[Christopher Schneider]

Yes. No, I don't think there's anything in there to read into that. Again, overall, we're expecting it to be right in for around 10% for the year. I had -- sometimes it has a little bit to do with the mix of new and renewal. But we're still seeing some pretty healthy rollover rent growth.

[Operator]

Your next question is from Mike Mueller of JPMorgan.

[Michael Mueller, JPMorgan Chase & Co]

Yes, hi. In terms of lease duration, it looks like in 2019 your new leases were 5.6 years and the renewals were 4.3. If we look at 2020 year-to-date, and it looks like renewals are 7 to 8 years and the new is in the low-to-mid 4s. Can you just give us a little color on the changes there?

[Christopher Schneider]

Yes. Again, overall, if you look at the total of this term were about 7.5 years. So and that's actually higher than that -- the run rate is going. So and we -- in the -- the renewals are up a little bit, we had a larger tenant that renewed on a 10-year basis, so that kind of pushed renewals up but generally, you're going to see new is probably going to be a little bit higher and renewal a little bit lower but we had a large tenant that renewed, so it kind of pushed the numbers.

[Michael Mueller, JPMorgan Chase & Co]

Got it.

[Peter Baccile, President and Chief Executive Officer]

We've been pushing to extend term the last few years, Mike, and make sure we maintain pretty strong rent bumps in those leases, so that's really where you're seeing the change.

[Operator]

Your next question is from David Rodgers of Baird.

[David Rodgers, Robert W. Baird & Co]

Yes, good morning, guys. I wanted to ask specifically about kind of blend and extend and how you guys have maybe tackled some of that with respect to deferrals. And maybe a broader question then around just the leasing activity. A great commencement in the second quarter, and would we expect to see the commencement volume slow a little bit in the third quarter just as kind of COVID catches up to the numbers that you report?

[Peter Schultz, Executive Vice President]

You want to talk a little bit, Chris, about our deferrals?

[Christopher Schneider]

Yes. As far as the one in extend, under deferrals we talked about it in the script. So the deferrals, we've deferred in total about $750,000 of rent, all of those agreements that we've entered into, they're -- they'll repay that deferred rent by the end of '20. So we really haven't done much on the one in extend.

[Peter Baccile, President and Chief Executive Officer]

And it's too early to tell but they've all been paying so far, so...

[David Rodgers, Robert W. Baird & Co]

Correct, correct.

[Scott Musil, Chief Financial Officer]

Yes. And Dave, you reached out to our -- this morning, on the methodology for same-store. As long as the deferrals are paid back or the agreements to pay back within 12 months, there really isn't any timing difference in same-store. As an example, if we bill $100 in June and the tenant's paying us back over the third quarter, we show that revenue in June for same-store purposes, but keep in mind, our deferrals are very minimal. As Peter mentioned in the script, it's only about $750,000.

[David Rodgers, Robert W. Baird & Co]

And then, with respect to just kind of lease commencements in the third quarter and the activity you saw on the second. I know you kind of quote the commencements in your numbers, which were really strong. Do you expect that finally kind of cycling through the second quarter signings that you would see that come through in the third quarter or we -- not really expect to see that?

[Scott Musil, Chief Financial Officer]

David, you're asking about the 83%, the expirations we'd taken care of for 2020. Yes, I'm guessing by the end of the third quarter that number is going to be pretty close to 100%, except to the extent that there are any move-outs. And then, in the third quarter on our call, we should have a pretty good idea of the lease signings for 2021.

[David Rodgers, Robert W. Baird & Co]

Okay. Maybe, let me ask a different question maybe a different way. So year-to-date, obviously, March, April, and May slowed down quite a bit for you guys from a leasing perspective, and now the backlog that really built back up and we're trying to catch up. And I guess if you took the first seven months of the year and compared that activity to the same seven month a year ago, how far is business up, down from a leasing perspective in your overall mind just for your portfolio as you think about it?

[Scott Musil, Chief Financial Officer]

Hey, David, if you look at the 83% statistic, it's very similar to what it's been the past couple of years. Having said that, renewals were slow going into the pandemic in April, May but they started to really pick up in June and July, to-date. So we're back on track, so the 83% that we've signed to-date is very similar to what it's been in the past years.

[Peter Baccile, President and Chief Executive Officer]

And we're actually not behind on developments, because as you know, we didn't have any new starts and much of the pipeline isn't finished yet and except for the asset that we leased in Baltimore almost immediately. So from that standpoint, we're kind of caught up if you will too with prior year performance.

[David Rodgers, Robert W. Baird & Co]

All right, great, that's helpful. And maybe just last one, Scott, for you on the debt side, given the debt in the quarter. And you mentioned kind of the drag maybe on paying down the line of credit, but as you think about the spreads and as you think about kind of using the private side of the debt market versus going to the public market and relative to where your peers are, given your debt metrics, given your leverage overall and the liquidity that you've created, do you guys maybe sense if there is any potential upgrades coming your way? Do you feel like that spread should be collapsing a little bit more for you in the portfolio or is that more a function of size in the coming years?

[Peter Baccile, President and Chief Executive Officer]

In terms of an upgrade, it seems to get the upgrade that the agencies would like us to be bigger. In terms of cost of capital, we think that, that spread we can -- we still have some work to do, things we can do to narrow the cost of capital on the debt side even without an upgrade. So just looking at different sources of debt and what those sources of debt cost. So we can do some of that, we are not in the public bond market, as you know. Typically, you need to issue $300-plus million if our average maturity is seven years that means you got to have a little bit over $2 billion of debt to be a regular issuer in that market and we're going to be there in the not too distant future.

So we think there is some saving to be gained there too, but from an upgrade standpoint, our metrics certainly, if you compare our metrics across the board, it would look like we should be BBB+ but we're getting feedback that they want to -- they want us to be larger overall.

[Operator]

Your next question is from Omotayo Okusanya of Mizuho Securities.

[Omotayo Okusanya, Mizuho Securities]

Yes, good morning. Could you talk to us specifically, about what you're seeing in the Houston market?

[Peter Baccile, President and Chief Executive Officer]

Jojo, you want to take that about the Houston market?

[Johannson Yap, Chief Investment Officer]

Sure, sure. Let me -- we talked to you about our portfolio. I then talked to you a little bit about the market, so as I said our portfolio, we're doing quite well there, we're basically at 98% occupied and we've collected close to 100% of our rents there. Actually, to be exact, 99.7% collection, so our portfolio there is doing well. From a development standpoint, I spoke a little bit about that earlier in terms of limited showings on our Grand Parkway Katy development that is freeway frontage. I would tell you overall in the market, there is more construction than absorption and I would say that in terms of submarkets, the weaker submarket's still the North submarket because there is a greater imbalance of supply versus absorption there. Overall, actually growth in PV and Houston is good, but there's just more supply to be absorbed first before the rents starts firming up again.

[Omotayo Okusanya, Mizuho Securities]

Got you, that's helpful. And then, your same-store cash NOI calculation this quarter are you including the rent deferrals or excluding them from that number? There seems to be a wide range of practices happening this quarter across the industrial space?

[Scott Musil, Chief Financial Officer]

Well, we're -- So in my example, we are including rent deferrals in it. Again, for us, it's an immaterial number. And if you look at the industrial peer group, a bunch of us got together a couple of years ago to standardize definitions we're all doing it that way --.

[Omotayo Okusanya, Mizuho Securities]

Yes.

[Scott Musil, Chief Financial Officer]

For the most part. So again, in my example, if we bill rent in June and under a deferral agreement it's paid back over the next quarter, we'll get credit in the June billing period. But again for us, deferrals are pretty immaterial, it's only about $750,000 of rent we're deferring.

[Operator]

Your next question is from Jon Petersen of Jefferies.

[Jonathan Petersen, Jefferies LLC]

Great, thanks. Hoping you could give us a little more context on maybe how behavior -- your tenant behavior has changed in terms of where you're seeing demand in the different geographies and maybe by different building sizes. Maybe you can talk about like what you've seen, I guess, in the last three or four months and maybe what you expect to see through the rest of the year.

[Peter Baccile, President and Chief Executive Officer]

Peter Schultz, you want to start with that and then Jojo, you can provide your thoughts that would be great.

[Peter Schultz, Executive Vice President]

Sure. Good morning, John. It's Peter Schultz. First, I would say, during the first half of the second quarter, the majority of the activity was concentrated in large tenants, large spaces, food and beverage, e-commerce 3PLs and medical, most notably. As an example, the deal that we commented on in our remarks at our Nottingham Ridge project in Baltimore. The second half of the quarter, we saw activity broaden across industries and space sizes and in fact, the majority of the leases that we signed for a vacant space in the second quarter was 75,000 square feet or less. In the last 30 or 45 days, we've seen a noticeable uptick in requests for proposals, tours, inquiries and again, a broadening of industries, home improvement, paper and packaging, building materials, some home building-related and communications. And in Pennsylvania alone, as an example, since the beginning of June, we've seen a couple of dozen new requirements; the average square footage is about 350,000 feet. So it's been broad-based across the country, we've seen activity accelerate across size, ranges and we continue to be encouraged by the increase in confidence and the overall activity from prospective tenants. We'll see how much of that gets converted into signed deals in the coming months and we'll certainly update you on that on our next call.

[Johannson Yap, Chief Investment Officer]

That was a very comprehensive answer by Peter. The only thing I will add is that, anything -- in addition to the 3PL, the e-commerce and food-related industries, other activity that Peter mentioned, I would just add, anything that has to do with the supply chain for businesses has been pretty active from small to large. Give -- to give you an example, the material handling equipment tenant that we had in First Nandina II, they're really focused on helping tenants improve their warehouse management solutions. And then, just assisting, what I think is the growth part of our industry. And then, that we are seeing some signs of on shoring as well, not as big as e-commerce would relate our 3PLs, but there are activity now, some on shoring companies were trying to relocate their foreign operations in the U.S.

[Jonathan Petersen, Jefferies LLC]

Can you expand what sort of geographies are we seeing in the on shoring?

[Johannson Yap, Chief Investment Officer]

Basically, across the U.S. favoring markets where you have a lower cost of doing business.

[Jonathan Petersen, Jefferies LLC]

Got it. That's really helpful. And then, I was just looking at your top tenant list and unlike, or I guess, very similar to all of your peers, Amazon finds themselves on the top; I think it's 4%, a little over 4%. I'm just curious, industrials have historically been a sector, always been a sector with very diversified tenant basis but Amazon is a huge part. I mean, at what point do you worry about having too much tenant concentration or do you kind of put some certain tenants like Amazon in a different bucket where you don't mind if it's a high percentage?

[Peter Baccile, President and Chief Executive Officer]

Right. So we do pay attention to the concentration in our portfolio. We don't want too heavy a concentration with any particular tenant. Obviously, Amazon is a fantastic company with tremendous growth trajectory and from a competitive standpoint, we like their position in their world. So that plays a big factor and how we look at Amazon, yes, they're about 4% of our annual base rent at the end of 2Q. We certainly do more business with Amazon, I don't know that I can sit here today and tell you what the cut-off would be but we certainly have additional appetite capacity for Amazon.

[Operator]

Your next question is a follow-up from Eric Frankel of Green Street Advisors.

[Eric Frankel, Green Street Advisors]

Thank you. Scott, maybe you could just walk us through how you're thinking about your same-store forecast. Obviously, you increased the low end a little bit but you're still essentially guiding to roughly flat NOI growth for the second half of the year. So I'm just wondering are there any assumptions in there that we might be missing.

[Scott Musil, Chief Financial Officer]

Yes. The increase of our guidance at 25 basis points, Eric, had to do with a couple of items, it had to do with our new assumption that we're going to get a couple more months of rent from Pier 1, we've already received July and we have -- assuming we're going to see in August as well. And then, the other item had to do with our lower cash bad debt expense in the second quarter but you're right, the same-store does drop off in the second half. A couple of big pieces causing that, about 4 percentage points of it are the impact of free rent. So in the first half of 2020, we had the benefit of free rent burn-off on our Nandina Building in Southern California that helped us. We don't have that impact in the second half of 2020. Also, in the back half of 2020, we have some new leases in our projection, that do have free rent associated with them that did not have free rents in that same period in the prior year.

So a big piece of it is the free rent impact, about 1 percentage point is a drop in occupancy. A big piece of that is Pier 1 moving out and I'd say the other big piece is just our bad debt assumption. We recognized $800,000 of cash bad debt expense in the first half of the year and in the back half of the year, our assumption is $1.8 million. So those are the three big pieces causing the same-store decline in the first half of the year compared to the back half.

[Eric Frankel, Green Street Advisors]

Well, thanks for walking us through that. I just -- final question, obviously, your tone is a lot more optimistic than a few months ago. Is there any interest in pursuing spec development opportunities? Are there any markets where there might be a supply demand dynamic that would -- that will allow for that?

[Peter Baccile, President and Chief Executive Officer]

Yes. I might've spoken about this a little bit earlier but what we're --

[Eric Frankel, Green Street Advisors]

Sorry about that.

[Peter Baccile, President and Chief Executive Officer]

Evaluating, as I said in our portfolio, in our call at land bank today, we can build about 13 million square feet, the vast majority of that is entitled and ready to go. We're looking at opportunities right now, both within our portfolio as well as new acquisition and growth opportunities outside the portfolio. As soon as we get -- as soon as we feel confident that the current business environment is sustainable, we will be ready to go and we'll commence on new speculative starts. We want a little bit more time to pass, Eric, really just to make sure that all of the good conversations that we're having with tenants turn into leases on the assets that we're discussing with them now and it's not just talk and over the coming month or so, make sure that we don't go back to the March-April time period from a shutdown standpoint.

[Operator]

There are no other questions in queue. I'd like to turn the call back to Eric Baccile for any closing remarks.

[Peter Baccile, President and Chief Executive Officer]

Thank you, operator, and thanks to everyone for participating on our call today. Please feel free to reach out to Scott or me with any follow-up questions. We wish you and your loved ones a healthy and safe summer.

[Operator]

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