NYSE:DRE Duke Realty Q4 2021 Earnings Report Profile Duke Realty EPS ResultsActual EPS$0.27Consensus EPS $0.20Beat/MissBeat by +$0.07One Year Ago EPS$0.41Duke Realty Revenue ResultsActual RevenueN/AExpected RevenueN/ABeat/MissN/AYoY Revenue GrowthN/ADuke Realty Announcement DetailsQuarterQ4 2021Date1/25/2022TimeAfter Market ClosesConference Call DateThursday, January 27, 2022Conference Call Time4:45PM ETConference Call ResourcesConference Call AudioConference Call TranscriptAnnual Report (10-K)Company ProfilePowered by Duke Realty Q4 2021 Earnings Call TranscriptProvided by QuartrJanuary 27, 2022 ShareLink copied to clipboard.Key Takeaways Record leasing and rent growth: Duke signed an all-time high 33 million sq ft of leases in 2021 with 98.1% portfolio occupancy, delivering 35% GAAP and 19% cash rent growth on second-generation deals. Development momentum: The company broke ground on $1.4 billion of new projects in Q4 (80% in coastal Tier 1 markets) and ended the year with a $1.4 billion pipeline 48% pre-leased, targeting 65–70% value-creation margins. Robust market fundamentals: Q4 absorption reached 122 million sq ft against limited supply, driving a record low 3.2% national vacancy and 11% year-over-year asking rent growth, with ~10% expected in 2022. Ambitious 2022 guidance: The company forecasts core FFO of $1.87–$1.93 per share (up ~9.8%), AFFO growth of ~10.4%, and same-property NOI increases of 5.4–6.2%, powered by strong rent gains and high occupancy. Strengthened balance sheet: In 2021 Duke completed $1.1 billion of asset sales, $542 million of acquisitions, issued $950 million of green bonds at ~2%, and will retire $300 million of notes, leaving no major debt maturities until 2026. AI Generated. May Contain Errors.Conference Call Audio Live Call not available Earnings Conference CallDuke Realty Q4 202100:00 / 00:00Speed:1x1.25x1.5x2xThere are 20 speakers on the call. Operator00:00:00Ladies and gentlemen, thank you for standing by, and welcome to the Duke Realty Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we'll have a question and answer session. Instructions will be given at that time. As a reminder, today's call is being recorded. Operator00:00:18I'd like to turn the conference over to our host, Ron Hubbard. Please go ahead. Speaker 100:00:23Thank you. Good afternoon, everyone, and welcome to our Q4 year end earnings call. Joining me today are Jim Connor, Chairman and CEO Mark Denene, Chief Financial Officer Nick Anthony, Chief Investment Officer and Steve Schnur, Chief Operating Officer. Before we make our prepared remarks, let me remind you that certain statements made during this conference call may be forward looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks and other factors could adversely affect in the company's other SEC filings. Speaker 100:01:10All forward looking statements speak only as of today, January 27, 20 22, and we assume no obligation to update or revise any forward looking statements. A reconciliation to GAAP of the non GAAP financial measures We provide on this call is included in our earnings release. Our earnings release and supplemental package were distributed last night after the market closed. If you did not receive a copy, these documents are available in the Investor Relations section of our website at dukerealty.com. You can also find our earnings release, supplemental package, SEC reports and an audio webcast of this call in the Investor Relations section of our website. Speaker 100:01:51Now for our prepared statement, I'll turn it over to Jim Connor. Speaker 200:01:56Well, thanks, Ron, and good afternoon, everyone. Let me start by saying that 2021 was another outstanding year for Duke Realty. We met or exceeded all of our 2021 goals, including our revised guidance throughout the year. We also capped off the year with an excellent Q4 from an operational and financial perspective That sets us up for a great 2022 and beyond. So let me recap a couple of highlights from our outstanding year. Speaker 200:02:22We signed over 33,000,000 square foot of Leases, which is an all time method for us. We concluded the year with our in service portfolio at 98.1 percent leased, A company record and particularly impressive as it includes the delivery of 7,700,000 square feet of development projects in 2021. We renewed 75% of our leases or 90% when you include immediate backfills. We attained 35% GAAP rent growth and 19% cash rent growth on 2nd generation leases for the full year, respectively, both all time records for us. We have same property NOI on a cash basis at 5.3%. Speaker 200:03:05We placed $1,000,000,000 of developments in service that were originally 39% leased at start dates, but are now 90% leased with a value creation of 69%. We commenced $1,400,000,000 in new developments across 33 projects, which was another all time record. 61 percent of those projects were in coastal Tier 1 markets. We completed $1,100,000,000 of property dispositions and $542,000,000 of acquisitions. We raised $950,000,000 in green bonds with 10 year terms and an average coupon of 2% and we increased our annual common dividend by 8.9%. Speaker 200:03:46And finally, we've continued to run our company in the most responsible manner with our ESG culture and our numerous corporate responsibility achievements, including our significant carbon neutrality goals, which were announced in November. So now let me turn it over to Steve to cover operations for the quarter and touch on some market fundamentals. Speaker 300:04:06Thanks, Jim. I'll first touch on overall market fundamentals. 4th quarter demand was exceptional in the logistics sector with With 122,000,000 square feet of absorption, about similar to last quarter and the 3rd highest quarter on record. Demand exceeded supply by about 40,000,000 square feet, which dropped national vacancy rates to an all time record low of 3.2%, which which is over 300 basis points below long term historical averages. For the full year, demand was 433,000,000 square feet compared to completions of 268,000,000 feet. Speaker 300:04:43Lease activity was robust in nearly all user groups, with e commerce, 3rd party logistics and retail representing the largest segments in the market as a whole, as well as in our own portfolio. National Asking rental rates rose again in the 4th quarter, up 11% over this time last year. We see this trend continuing into 2022 with nationwide market rent growth on average expected to be around 10%. The reaction to supply chain bottlenecks continues to be in the early stages of a longer term boom for our sector. CBRE recently reaffirmed the just in case inventory restocking strategy will be a significant contributor to Consumer spending growth and the continued secular growth in online shopping are driving much of this demand. Speaker 300:05:42For the current year, we expect that demand The current supply pipeline is not located in our submarkets. Turning to our own portfolio results. We Excuse me, a very strong quarter by signing 8,900,000 square feet of leases with an average transaction size of 122,000 feet. Rent growth for the 4th quarter leasing was again very strong at 21% cash and 41% GAAP. We expect growth in rents on 2nd generation leasing for the foreseeable future to be very strong. Speaker 300:06:24In our portfolio, we estimate our lease mark to market to 39%. Turning to development, we had a tremendous quarter of starts, as Jim mentioned, breaking ground on 9 projects, $466,000,000 in cost. 80% of the 4th quarter development starts were in coastal Tier 1 markets and 6 of the 9 projects were redevelopments of existing site structures. Our development pipeline at year end totaled $1,400,000,000 This pipeline is 48% pre leased with active prospects to bring this number even higher in the near term. We expect to generate value creation margins in the 65% to 70% range of these projects. Speaker 300:07:06Looking forward, our prospect list for new development starts is very strong and our land balance at year end $475,000,000 with an additional $173,000,000 of covered land plays. Our current land holdings are above our levels in the last few years and consistent with what we've recently communicated as much of the land acquired late in 2021 has been under contract for several quarters. 94% of our land balance is located in coastal Tier 1 markets. We own or control land that can support roughly $1,000,000,000 of annual starts for 2 times our book basis, and on average, we've only owned this land for about 2 years. Our favorable land value will We believe we are very well positioned to continue to With that, I'll turn it over to Nick Anthony to cover acquisition and disposition activity for the quarter. Speaker 400:08:13Thanks, Steve. During the quarter, we closed on $206,000,000 $1,000,000,000 acquisitions, most notably a 470,000 square foot property in Northern New Jersey and an off market transaction as well as 3 facilities in Southern California totaling 134,000 square feet. As noted on the last call, early in the Q4, we sold a recently completed project in Columbus, Ohio, which was leased to Amazon, generating proceeds of $80,000,000 I would point out that this transaction was placed under contract in April of 2021 as part of or takeout. For the full year, our capital recycling encompassed $1,100,000,000 of asset sales and 542,000,000 of acquisitions. Combined with the development previously mentioned by Steve, this activity moves our coastal Tier 1 exposure to 43% of NOI and overall Tier 1 exposure to 68 percent of NOI. Speaker 400:09:07Also, earlier this month, we closed on the 3rd tranche of assets to our joint venture with CBRE Global Partners, for which our share of the proceeds was $269,000,000 The other dispositions expected this year are primarily individual assets across multiple markets and are projected to close primarily in the second and third quarters of 2022. Speaker 300:09:29I'll now turn Speaker 400:09:29it over to Mark to cover earnings results and balance sheet activities. Speaker 500:09:33Thanks, Nick. Core FFO for the quarter was $0.44 per share compared to core FFO of $0.46 per share in the 3rd quarter and $0.41 per share reported for the Q4 of 2020. Core FFO decreased slightly from the Q3 of 2021 as we executed a significant volume of asset dispositions during the 3rd quarter and did not fully redeploy the proceeds until late in Q4. Core FFO was $1.73 per share for the full year 'twenty one compared to $1.52 per share for 2020, which represented a 13.8% increase. FFO as defined by NAREIT was $1.65 per share for the full year 'twenty one compared to $1.40 per share for 2020. Speaker 500:10:20AFFO totaled $589,000,000 for the full year 'twenty one Compared to $517,000,000 in 2020 $148,000,000 for the Q4 of 'twenty one, Our annual results represented 11.6% increase to AFFO on a share adjusted basis compared to 2020. Same property NOI growth on a cash basis for the 3 months 12 months ended Twelvethirty Onetwenty 1 was 5.2% and 5.3% respectively. I would like to point out that we continue to generate substantial NOI and FFO growth Outside of our same property pool as net operating income from non same store properties was 17.6% of total net operating income for the quarter. Same property NOI growth on a net effective basis was 3.9% for the 4th quarter and 4.5% for the full year 2021. As Nick mentioned, we closed on the 3rd tranche of our contribution to our JV with CBRE Global earlier this month. Speaker 500:11:21We'll use the proceeds of this contribution along with mortgage financing proceeds received from the JV, both of which totaled just over $300,000,000 To fund the redemption next month of our $300,000,000 3.75 percent unsecured notes, which were originally scheduled to mature in December of 2024. After this transaction closes, we will have no significant debt maturities until 2026 and ample liquidity to fund our growth. Looking into 2022, yesterday we announced the range for 20.22 core FFO per share of $1.87 to $1.93 per share with a midpoint of $1.90 representing a 9.8% increase over 'twenty one results. We also announced growth in AFFO on a share adjusted basis to range between 8.4% and 12.3% with the midpoint of 10.4%. Same property NOI growth on a cash basis is projected in the range of 5.4% to 6.2%. Speaker 500:12:21In addition to realizing a full year of the impact Rental rate growth on leases we executed in 2021, we continue to expect strong rental rate increases in 2022. While on the surface it seems we have abnormally low lease expirations, we typically re lease significantly more than is contractually set to roll with some pull forwards of future expirations. For instance, a year ago, our expiration schedule said we had 7% expiring in 2021, but we actually rolled over 12%. And in fact, in this environment, our customers and their brokers have been actively approaching us for early renewals. We expect proceeds from building dispositions in the range of $600,000,000 to $800,000,000 and we have targeted assets with long lease terms and low annual rental escalations in our disposition strategy for the year. Speaker 500:13:10Development starts are projected in the range of $1,200,000,000 to 1,400,000,000 with a continuing target to maintain the pipeline at a healthy level of pre leasing. Our 22 development plans include a significant component of speculative projects in Take advantage of the continued rental rate increases in those markets. More specific assumptions and components of our 2022 guidance are available in the 2022 range of estimates document on the Investor Relations website. Now, I'll turn it back over to Jim for a few final comments. Speaker 600:13:47Thank you, Speaker 200:13:48Mark. In closing, I'd like to reiterate what a great year 2021 was for Duke Realty. As I noted at the outset, we exceeded all of our beginning of the year As we look ahead into 2022, all of the demand drivers remain exceptionally strong. Demand is We'll continue to see the added value created by our dominant development platform. As Mark noted, the midpoint of our FFO and AFFO guidance is roughly 10% over 2021, which is a level of growth We believe we should be able to achieve on a consistent basis for the foreseeable future with our platform and the current market fundamentals. Speaker 200:14:36Finally, I'd be remiss if I didn't thank all of my colleagues at Duke Realty for all their hard work and dedication that allowed us to achieve the level of success we have. I also want to thank all of our investors for their continued support and the recognition of our good stewardship of their invested capital. Now we'll open it up for questions. I would ask that you limit your questions to 1 or perhaps 2 short questions. And of course, you are always welcome to get back in the queue. Speaker 200:15:05Okay? Operator, we'll now take questions. Operator00:15:08Thank you. Our first question will come from the line of Nick Yuriko, please go ahead. Speaker 700:15:20Thanks. Hi, everyone. In terms of the development starts, maybe you can just give us a feel for what's driving The range of starts this year, which is actually a bit lower than last year, what is the thought process there? And what would be a situation where you would Get even more comfortable increasing your development starts. Speaker 200:15:41Thanks, Zach. I'll start off and then Steve can give you some color. I would say it's 2 things. We've always had a solid build to suit pipeline. And I think if we can continue to do a number of those large build to suits like we have, I would see us Work towards the high end of our guidance. Speaker 200:16:04And the other thing ties back to our leasing. If we can continue to lease at the levels we have In 2001, I think we can accelerate speculative development as well. And I think that would push us up to the high end or I don't know, Steve, if you have any additional color you want to add? Speaker 300:16:22Yes. Nick, I would just say, I mean, you look back at last year, Our budget going into the year was in the $850,000,000 range. We did $1,400,000,000 I mean, we had a very strong year in 2021. I think heading into 22, we feel very good about our prospects, but part of it is getting our getting out of the right sites and title and getting them started. The demand picture is strong. Speaker 300:16:47It's more about being able to find the opportunities to get them started. Speaker 700:16:53Okay, thanks. Just a follow-up on development pipeline and the margin that you're citing. How should it which went up versus last quarter, cap rates down, but yields compressing a bit on Development, new starts, I mean, how should we just think about that dynamic going forward about where cap rates can move, where development yields are penciling out over the next year? Speaker 400:17:20Hey, Nick, this is Nick from Sprig Realty. I think we continue to see very strong rent growth In the markets that we're focused on and I think as long as we can continue to see that rent growth that will continue to help us achieve The above normal margins that we've been achieving historically. Yes. Speaker 500:17:38And I would just point out, Nick, that a little bit of the decrease in the stabilized yield in the pipeline from last quarter to this It's really a market mix situation. We placed some assets in service that were in Lower barrier markets with higher yields and replace that with new developments in more coastal markets that The initial yield may be a little lower, but it's a market mix. The value that we're creating actually went up. Speaker 200:18:05Yes. And I Speaker 400:18:05would tell you on cap rates, I mean, even though We still have not seen any increase in cap rates even with interest rates going up. Still very strong investor demand out there, and Speaker 800:18:19we expect that to continue for the foreseeable future. Speaker 700:18:22Okay. Thanks, guys. Appreciate Speaker 200:18:24it. Thank Operator00:18:27you. Our next question then will come from the line of Jamie Feldman. Please go ahead. Speaker 900:18:33Great. Thank you. I guess, I know you touched on it a little bit, but can you just talk about more about the kind of big picture supply story? I mean, you see some of the projections coming out of the brokerage firms in 400,000,000 or 500,000,000 square foot range for the U. S. Speaker 900:18:48This year. Just How should we be thinking about the risk of the cycle ending early or just the exposure in your markets or Just thinking about the largest pieces of that? Speaker 200:19:02Jamie, we see the same data that you do. And we've been hearing these Same stories for the last several years. And I think there's a pretty substantial disconnect to this projected supply number and actual annual completions. And I'm sure the devil is in the detail on how some people count in terms of announced projects as opposed to actually really started projects. But I think in today's world, the rising cost Of building materials, the rising cost of land, the increased level of difficulty to get sites entitled And out of the ground, is placing, if you will, an artificial damper on new supply. Speaker 200:19:48So while everybody Saying supply and demand will be equal. I wouldn't be surprised if we were here a year from now and we'd had another year like this where demand exceeded supply Simply for those reasons I cited earlier. Speaker 900:20:02Okay. And then we keep hearing about for the supply we're seeing or that's being built and some of it's in more tertiary submarkets. What's your thought on that being competitive Putting pressure on rents in your portfolio or for your development projects. Are you seeing a real difference in pricing across different submarkets in the same market? Speaker 300:20:25No, Jamie, I'll start. I would tell We're not seeing big variations between submarkets in the markets We're in, I mean, when you look at the under construction pipeline, I mentioned that 65% of it is not in Either markets or submarkets we operate in, Phoenix is an area that's got a lot of construction going on right now. We're not in that market. Greenville, right? Memphis, San Antonio, a lot of these markets that we don't own a property in that have big supply numbers. Speaker 300:21:05In terms of the markets that we own property in, the 19 markets we're in, I would say Houston is probably the one that we've talked about on a number of these calls that continues to be a little soft and not one that We will be starting to building in anytime soon. Speaker 900:21:28But I guess Even within your the markets you are in where there is supply, you think rents are kind of constant across submarkets? Speaker 300:21:36Yes. I mean, it varies, right? You've got it's jumping all over, but you've got no, I mean, in markets we're in, We're seeing strong rental growth. I mean, obviously, we put up record numbers for ourselves this year. I think we went into this year Into 'twenty one, thinking that market rent growth in the U. Speaker 300:21:55S. Was going to be in that mid single digits to maybe pushing double digits, and we were wrong again, and it ended at 11 And I think it's set up to do the same thing in 2022. Speaker 900:22:08Okay. All right. Thank you. Operator00:22:12Our next question will come from the line of Ki Bin Kim. Please go ahead. Speaker 1000:22:17Thanks. Congrats to another great year. Just wanted to stick with the development topic. With the total value notching down just a little bit, But if you think about the inflation that we've seen, it probably implies that the square footage or a number of projects that you're actually projecting to start on is lower than the dollar value. So can you just talk about that part of it and what yields you're expecting for your 2022 start? Speaker 200:22:45Go ahead, Steve. Speaker 300:22:47Sure. Stephen, it does depend on where we end up That range, right? But I think it's safe to say that we'll do somewhere between 8,000,000 to 10,000,000 square feet of new development starts. As Jim or Mark alluded to early on, part of it is that the demand picture looks really good for us. We've got a number of large projects we're working on, but it depends on some of that pre leasing and how much risk we want to take on. Speaker 300:23:17And in In terms of returns, our stabilized returns, again, I think will be a little dependent on market mix. But Assuming we're consistent with 60% to 75% in our high barrier markets, I think the returns in the low 5 Stabilize is probably a reasonable expectation, and I think our value creations, considering where cap rates are, are still going to be Healthy as they are today. Speaker 500:23:48Yes. The only other thing I would point out, Ki Bin, is you're right on. I mean, I think If you do theoretically the same dollar value development this year that you did last year, on a cost per square foot basis, it's going up, Right. So you're probably developing less square feet because costs are going up, but part of it is also market mix once again, right. It's we're going to do smaller buildings per se per dollar per square foot in these coastal markets, which is where more of our Development continues to take place. Speaker 1000:24:24Got you. And on a separate topic, where do you think we are in terms of the structure builds out to support e commerce growth. And I'm curious if you think 2021 was a kind of pull forward demand year and if the next couple of years look a little bit more normalized. Speaker 200:24:43Well, Let me answer both of those. We've been asked a number of times in a number of different ways about how the infrastructure bill and infrastructure spending is And I've told people that I think you have to exercise reasonable expectations. And The best example I can get is, remember we talked about the expansion of the Panama Canal for years and it took many years for it to get done and Complete and fully operational before we started to see the effect. So I think the legislation is still less than, what, probably 90 or 120 days old. You got to get projects approved and funded and started before you're going to see that. Speaker 200:25:27So I think it will be several years before we'll see the full impact of that. So, I think that's the that was the first question. And what was the second part of your question, Ki Bin? Speaker 1100:25:39So, I was actually Speaker 1000:25:40talking more about The warehouse network build out for e commerce, not the infrastructure bill, and where we are in terms of innings. And if you think 2021 was like a pull forward year where Maybe 2022, 2023 looks a little bit more normalized. Speaker 500:25:54Well, I would tell you, Speaker 200:25:55I think we believe 2020 was a full forward year. And I think if you look at some of the big Players in e commerce and the traditional retailers that have moved very strong into e commerce, Their numbers for 2021 were down over 20. And I think these are somewhat more normalized years that we're in, but I think everybody believes we're still in the early innings in terms of the development of fulfillment centers and e commerce supply Last mile facilities for e commerce retailer as well as our traditional customers like FedEx and UPS Continue to grow dramatically. So I think we're in the early innings. I think you'll continue to see some ups and downs with different aspects of business, I think we're going to continue to see that sector grow at a very healthy rate. Speaker 1000:26:48Okay. Thank you. Operator00:26:52Our next question then will come from the line of Dave Rodgers. Please go ahead. Speaker 600:26:56Yes. Good afternoon, everybody. Obviously, the financial guidance you gave is pretty bullish for The year ahead and I think largely expected by The Street, it seems like and maybe we've all touched on it a little bit, the investment guidance is much More conservative, lower acquisitions, lower dispositions, lower development starts than kind of where you were last year. But I guess I wanted to understand that more and even Mark's Comments about using asset sales to pay off debt as opposed to kind of growing and shrinking the balance sheet versus growing it. So I guess I want to understand, is there something that you're worried Do you have the ability to take development starts to $1,700,000,000 with the combination of land, entitlements, labor, Steel or are there some natural barriers right now that you're coming up against in terms of being able to invest more capital more aggressively given the low vacancy rate? Speaker 200:27:45Well, let me start off and then others can chime in. No, we're not we don't have any barriers. And I think if you look at where we started the year with guidance in 2021 of $850,000,000 and where we ended up the year, I think those possibilities exist. As I said earlier about the development pipeline, it's a function of some of the bigger build And how many of those we signed during the year that would push us towards the higher end of guidance or to exceed our Initial guidance, much like we did last year and then its continued leasing volume and the ability for us to accelerate more speculative development in most of those markets. We've ramped up our land holdings to support a significantly larger development pipeline going forward. Speaker 200:28:35And I think we've indicated that we're going to continue to be actively buying land. So no, we're not there's no hidden message. We're not managing. I think this is probably pretty Consistent, good, strong, but prudent guidance. And I hope to have the opportunity to tell you over the course of 2022 that we intend to raise Speaker 500:28:56Yes, David, I would just add to your specific point on asset sales to pay the debt off that I Did refer to. That's really a temporary thing. It's not like we went out and sold assets to pay back debt or to buy back debt early. That was really just to keep from having a bunch of cash sitting on our balance sheet here in the Q1. The way we look at that, it just frees up our balance To do even more debt now to fund this growth that Jim just went through without deteriorating our balance sheet. Speaker 500:29:26So that was really more just a temporary use of cash. Speaker 400:29:29Yes. And then lastly, Dave, I would add on the acquisition side, I think last year we had a midpoint guidance of about $400,000,000 We did like $530,000,000 or 540, Acquisitions are tough. You just it depends on what the opportunities are. And frankly, most of the majority of our growth is going to be through development because we like the risk adjusted returns there better than the acquisitions. Speaker 600:29:53Great. And then Nick, maybe just staying with you for a follow-up on the cap rates for acquisitions and dispositions, realizing they're relatively small, but it's about 100 and And dispositions realizing they're relatively small, but it's about 120 basis point spread between acquisitions and dispositions last year. There was a lot of In's and out, and it seems like this year might have some skew as well. But can you talk about that spread in 2022? And maybe kind of what that normalizes That looks like ex Amazon. Speaker 400:30:16Yes, I think those spreads will continue to be about the same. What I would point out though is The total returns or the IRRs, the spreads have expanded in the last 18 months. And for 2021, we calculated the spread at about 2 50 bps that our acquisition IRRs were Operator00:30:49Our next question will come from the line of Caitlin Burrows. Please go ahead. Speaker 1200:30:55Hi there. I guess, good afternoon. I guess, as you guys look at occupancy, you ended the year almost 98% occupied, And it seems like you generally expect that to stay flat or even increase at the mid or high end of your guidance. So just wondering if you can give some current thoughts on Kind of ideal occupancy and recognize that not necessarily the key metric, but how occupancy that high makes you comfortable that you are indeed getting the strongest rent growth and same And why growth is that possible? Speaker 500:31:24Well, I'll start, Caitlin. I mean, I quite frankly, I like 100 percent occupancy. Jim is always talking about 96 or 97 and having some room, but as long as we're getting the best rents we can get, why wouldn't you want a lot of occupancy I think I just go back and I look at you look at our rent growth that we posted, and I think we'll be at or near the top of our peer group. So As long as we're posting rent growth numbers that are at or near the top of our rent growth peer group, I'm sorry, having high occupancy levels is a good thing. From a same property perspective specifically, and we don't really give guidance on same property occupancy, But I could actually see that even pick up a little bit, not a lot, but maybe 20 basis points to 30 basis points from 'twenty one to 'twenty two. Speaker 500:32:11And being that kind of low to mid-ninety eight percent range, and that's really what we're projecting. We don't have a lot of expirations like I pointed out in our prepared remarks, but we will likely roll more of our portfolio than what's expiring, but that doesn't do anything in the occupancy, right. It's just keeping Tenants in there and it's getting to that rent stream even quicker. Speaker 1200:32:35Got it. And maybe just a Quick follow-up on kind of leasing trends. I know last quarter you guys gave some impressive stats on how lease spec Properties were when they went into service at 90% and that the average lease up time since 2019 of your expected elements had been under 2 months from having been placed in service. So just wondering, I know it's only been a quarter, so they don't move that drastically that quickly. But Wondering if you have any reason to believe that, that lease up timing could begin to take longer or if that's just Speaker 400:33:06not much of a problem? Speaker 200:33:07No. I would say Speaker 500:33:08as we sit here today, it's still pretty much right on the timing, I guess, that we've been at the last 12 months. Like if you look, for example, At the deliveries this quarter, they were 71% leased when they went into service, but they were actually 39% leased when we started those projects. We almost kind of almost doubled the occupancy, if you will, before they were even placed in service. So we still continue, especially in markets like Southern Cal and Northern New Jersey, to lease most of these projects up before they even go on service. So, in those markets, you're looking at 0 to 2 to 3 months of lease up time on average and then in the other markets, it's maybe 6 to 9 months. Speaker 500:33:51So we continually beat our underwriting, which is 12 months. And I would say as we sit here today looking at our pipeline that we just started and what's about to come in, what we plan on starting Next couple of quarters, I think it's going to look very similar. Speaker 200:34:04Yes. The other metric that we point to is we've got In the portfolio, a little under 6,500,000 square feet of vacant space, 75% of which is not in service yet. So I think that speaks to the strength of leasing activity that teams are seeing all across the country and the opportunity is for continued outperformance in that area. Speaker 1200:34:30Yes. Got it. Thank you. Operator00:34:36Our next question will come from the line of Ronald Kamdin. Please go ahead. Speaker 1300:34:40Hey, two quick ones for me. Congrats on a great year. Just sticking to sort of the previous question on the same store NOI guidance, Yes, I think when I think about sort of the rent growth numbers that you're posting, obviously, the rent bumps are what they are, Potentially some occupancy tailwinds. When you think about why not higher, is it mostly because there's fewer leases rolling as you mentioned? Or is there anything else With free rent or anything else, we should be aware of that, that maybe is keeping that number a little bit lower? Speaker 500:35:16No, it's really roll. I mean, if you look at what I call deal quality, the rent growth we're getting, The overall rates we're getting on deals, I'll put our deals up against anybody. I think our deal quality is as good or better than anybody, any other peers out there. We do have less roll. I mean, that's a fact. Speaker 500:35:34I mean, so you got to look at on a risk adjusted return, we're very happy with the guidance we put out. But the other thing I would just tell you on roll, like I mentioned in my prepared remarks, for 2021, We were supposed to have 7% of our leases roll. We actually rolled 12%. If you look at 22%, that's in our supplemental, we're showing 5% When we're all said and done, it will probably be closer to 10% that will roll. So if you take that, you really need to take those 2 years and average them together, because you got to remember A lot of the 'twenty two same property growth will come from the 'twenty one leases we signed and only part of 'twenty two will come from the 'twenty two leases we signed. Speaker 500:36:14Some of that will affect 'twenty three. So if you average 'twenty one and 'twenty two together, we're going to call it roll 11% of our portfolio over that 2 year period At a 20% cash rent growth number that we've been posting, that's a little over 2%. You add the rent bumps to that that are embedded in our portfolio That gets you up close to 5%. Our guidance is close to 6% because the difference would be occupancy, free rent, things like that. So hopefully that kind of walks you through. Speaker 200:36:41Yes. The other thing I would add, Ron, is the upside for us is what leases we can get our hands on early, quite candidly. And at this point early in the year, I don't think Steve's guys across the country have a real good idea All of the total amount of leases we'll be able to pull forward and which ones they are, because it's early in the year and we're just in Discovery dialogue is a lot low. So depending how many we can pull forward, well, I think really dictate how close to the upper end we can get. And then Speaker 500:37:17the last point I would make circling back to, I think it was Dave Rogers' question and Nick on Dispositions and maybe being a little higher. The assets that we have targeted for disposition are assets quite frankly that we think we've really Maximize the value on them. There are some of our assets that had longer term leases in it, quite frankly lower rent bumps and we think we can get very attractive cap rates on those assets. So we can sell those where we think we've maximized the value and it really just helps our same property pool looking forward more into 2023. Those kind of items will be more of an impact on 2023, but we continue to get those lower growth assets out of our portfolio and replace them with higher growth assets. Speaker 1300:38:03Great. And then just if I could sneak in a quick one. Just on the wage expenses, Maybe can you talk about sort of what you're seeing on the ground with sort of the constructions and so forth, what you're hearing from tenants, Anything any number you could throw around it? Is it up 7%, 8% year over year would be really helpful? Thank you. Speaker 300:38:28Was that question on wages for warehouse workers or construction costs? For warehouse workers, Operator00:38:35yes. Thank you. Speaker 300:38:38I think it varies by region, but you've probably seen a 10% to 20% increase in some wages dependent on the areas. I mean, look, our customers, I think Caitlin asked a question earlier about These conversations with tenants and this is a conversation that Jim has with the operating teams quite often, which is, are we pushing hard enough? And our customers There are a lot Speaker 200:39:06of Speaker 300:39:06pressure from a bunch of different points of their business, right, between transportation costs are up significantly, Wages are up. Rent continues to be a relatively small part of the overall logistics cost. So they're facing quite a few inflationary challenges out there, but rent continues to be a small part of it. Speaker 700:39:32Thank you. Operator00:39:36The next question will come from the line of Emmanuel Korchman. Please go ahead. Speaker 1400:39:41Hey, guys. This is one for, I don't know, a combination of, I guess, Steve and Mark. You spoke about the 2021 Pullback or not pullback, but the early renewals, and then 2022, a couple of questions. When you signed leases early, so the 2022 leases that you signed that were not expiring, Do those rent bumps take place immediately? Mark, you spoke about the benefits the same store NOI, but do the new rents become effective at the end of the lease or mid lease because you're doing it badly. Speaker 500:40:12It varies, Manny. Generally, they don't take effect until the current lease ends. There are some exceptions to that, but generally they don't take place till the new lease ends or the current lease ends. Speaker 300:40:29Yes. I would agree. I would say the one exception, Manny, is some of these conversations That take place around the tenants' needs, right, whether they need something done to the building, some improvements. A lot of times, we'll redo the lease at But as Mark said, I'd say 75% of them have to do with natural exploration. Speaker 500:40:53And the only other point I would make is these are not just to be clear, we do a few, but these are not generally leases that were Expected to roll in 2 or 3 years from now. These are generally 6 to 9 month early. Speaker 1400:41:10Jim, it's Mike. Right. But Mark, I guess the point I'm making is you talk about the big benefit You have cash flow from doing them early, but we from a model perspective, from a cash flow perspective, the fact that you've signed them early in your leasing Doesn't really impact cash flows, right? So your 2022 at this point is still going to your natural lease expiration in 2022 is going to be about the same because you've just None of them 69 months early, right? From a cash flow perspective, Speaker 500:41:41you're exactly right. That's why I said you really need to average a couple of years together, because The impact what I was trying to say is the impact of a lot of the leases we signed in 2021 hit us now in 2022. So that's why you need to really take a couple of years and average them together. You're exactly right. Speaker 1400:41:58And then I think you mentioned 20% cash rental rate growth When we do that average, is that implying can we use that to imply what your 2022 rent growth is going to be? Or do you want to guide us sort of where those numbers fall out. Speaker 500:42:13Well, I think what we would say is we expect as we sit here today, we expect 'twenty two's rent growth numbers to look very similar to 'twenty one, which is called in that mid to high 30% on a GAAP basis and high teens to low 20% on a cash. So yes, it's right in that area. Speaker 1400:42:28And I think Michael had a follow-up. Speaker 800:42:30Hey, Jim, it's Bill Enderman. Just a question as you think about longer term strategic planning, Has anything changed in your mind or at the Board level about either global expansion, maybe diving deeper into the asset management business, taking advantage of all the significant capitals out there. Obviously, you did the CBRE Venture, but going deeper and then thinking about helping your tenants, you look at what Prologis is doing in their Essentials business. Does any of that start to rise up higher in your strategic thinking? Speaker 200:43:07Yes, those are I'm sorry, Michael. Those are all topics that are consistently debated in our Strategic planning efforts and at the Board effort. And We're not prepared to announce any of those, but they're all in the mix and they're all certainly things that we're talking about today. They're all things that Given our size and scale, are opportunities for us. Speaker 800:43:39So it sounds like I don't know if you're able to rank those three things, global, asset management and essentials. Which one of them would be closer to potentially going forward? Because I think your comments in the past have been, you want to be a U. S. Focused company, that's what distinguishes you relative To the peer set, you don't want to become a massive asset manager. Speaker 800:44:02You want to sort of do small direct ventures when the time needs to not put Pressure on you to sort of fill those buckets. And then the last one being essential seems like the most logical one, but I don't want to put words in your mouth. Speaker 200:44:16And I appreciate that. No, I think you're correct. The opportunity for goods and services for our customers It's very attractive and I think that presents an interesting opportunity. Back to your original 2, international, I would say sitting here today, we think we still have ample opportunity to Grow in the U. S. Speaker 200:44:43Markets and we don't need to push to international to continue to maintain the level of growth that we had last year and that we're projecting into the coming years. In terms of the asset management side, Anytime we're doing a joint venture like the CBRE 1 or any of the other joint ventures, we have we still try and keep The leasing, the management and the asset management. So it is a source of fee revenue for us even when we do some of these ventures. I think it will be a while before we were willing to take a big, big step and get purely into the 3rd party asset management business. Speaker 500:45:25Okay. I'll see Speaker 1500:45:25you in Florida. Speaker 200:45:28Looking forward to it. Operator00:45:30Our next question will come from the line of Vince Tibone. Please go Speaker 1600:45:36ahead. Hi, good morning. How are you thinking about selling individual assets versus a Portfolio deal, are you seeing any differences in pricing or investor demand for single assets versus larger portfolios? Speaker 400:45:51Vince, this is Nick. Everything is very expensive. From our perspective on the Specifically on the acquisition side, we almost exclusively most of the transactions that we're executing on are lightly marketed or off market transactions. The reality is most of the portfolio deals are going to be fully marketed. We look at them. Speaker 400:46:18We look at them off market and lively market as well. But it is very challenging in the acquisition side right now. And Fortunately, we've got a good team in place that's leveraging the local development teams to go find some of these Interesting infill assets that we can buy at pretty good yields. Speaker 1600:46:42But what about on the sell side? I mean, do you think there is a portfolio premium today for a combination of assets and So many institutions looking to get into the sector or is it still selling single assets kind of gets you the same Overall execution is a bigger portfolio on the disposition side? Speaker 400:47:01That's always a tricky question, but I would answer Yes, there is a portfolio premium on the disposition side. You saw us do that on several transactions last year. The reality is because investor demand is so strong, when you can get a bigger portfolio pull together, a lot of times you can sort of leverage that Transaction now your buyer pool is going to be smaller. So there's a balancing act there. But a lot of times you can you really push pricing on some of these bigger deals. Speaker 1600:47:35That makes sense. That's helpful color. One more for me. The book value of your development land bank is around $650,000,000 What do you think the market value of that land is today? Speaker 500:47:482x. Yes, I think that we quoted that in our prepared remarks too. Vince may not have Yes, we think it's 2x what the book basis is. Again, if you want, there's a lot of this land We've just recently put on our balance sheet, but it's been under contract in some cases for 9 months to 12 months and market values have moved quite a bit in 9 months to 12 months. Speaker 1600:48:15Got it. Thank you. Speaker 200:48:16Yes. Operator00:48:19Our next question will come from the line of Rich Anderson, please go ahead. Speaker 1700:48:23Hey, thanks. Good afternoon. So I was looking at the same store projection For 2022 at midpoint 5.8 percent same store NOI, that's a different approach than what you've done in past years. In 2020, you started 4% and ended the year at 5%. In 2021, you started at 4% and ended the year at 5.3%. Speaker 1700:48:48I'm curious if given the fact that occupancy is so elevated, do you really see that there's upside to the 5.8 In a similar manner that you've been able to produce in previous years or do you think that's a kind of a full number at this point given all those inputs and outputs? Speaker 500:49:08Well, I would answer it this way, Rich. We're comfortable with the guidance we gave, which does have some room above the 5.8, the 5.8 is the midpoint. The guidance goes all the way up to, what is it, 6.2. So I would tell you that, yes, there's definitely some fuel in So to speak, to get to that 6.2%, I'm not prepared to sit here this early in the year and tell you we're going to get there, but there is a path. Speaker 1700:49:36Like 105 percent occupancy. Speaker 500:49:39I'm sorry, Rich? Speaker 1700:49:40Never mind. I said like 105 percent occupancy, but I was Speaker 200:49:46We're trying. I'm telling you, we're trying. Speaker 1700:49:50So second question for me is, You mentioned supply demand being in balance. We've heard that a lot in the past few years, again in 2022, and that equates 10% market rent growth, which is a nice position to be in. But since demand can Shock and turn off much faster than supply. At what point does that sort of that balance Get you nervous in the sense that, okay, if supply is running X percent above demand in the national view, Do you, as a company, start to take a more cautious approach to your own development process? Speaker 200:50:30Yes, Rich, I think we would. But I think here's the fact of the matter. U. S. Vacancy is 3.2%. Speaker 200:50:37If it goes up 100 basis points to 4.2, That's where we were in 2019, and we had a pretty good year in 2019. Not quite as good as 2021, But I think anytime you've got U. S. Vacancies under 5%, it's a landlord's market and you'll continue to see us be able to put Good value creation on the development side, both from build to suit and spec and continue to grow rents. Right. Speaker 1700:51:07And Just a quick, quick follow-up on the same topic. In Northern New Jersey, we're seeing a big spike in demand and perhaps no surprise they support Manhattan as well, of course. But is there anything unique going on in Northern New Jersey that you're seeing that is particularly sort of eye popping right now? Or is there just sort of Typical good dollar performance? Speaker 200:51:32No. Steve, you can talk about our demand is pretty much broad based. I mean, I can't tell you there's one phenomenon in some industry that's driving it. Steve? Speaker 300:51:42Yes, Rich, I would just tell you, I think the biggest thing happening around any of These large population centers is I think that the whole e commerce phenomenon is an online Economy is translated to our business, right? So there was a question earlier about where we are and what inning. And I think Amazon might be in one inning and everybody else is sort of just getting done with warm ups, right? So I think that's a big part of it. I think Northern New Jersey, in particular with the demand side is, the assets that are needed today, They're more modern assets for e commerce fulfillment, and they don't have that in Northern New Jersey. Speaker 300:52:29So you're seeing the lack of opportunities for greenfield development. You got a lot as we talked about in our remarks, 6 of our 9 projects 4th quarter redevelopment, so that's causing a lot of that demand as well as a lack of available ready to go opportunities. Speaker 200:52:44Yes, I Speaker 1700:52:45mean, that's all that. I know that. I just Saw a particular spike in Northern New Jersey that caught my attention, but perhaps we could take it offline. Thanks very much guys. Operator00:52:58Our next speaker then will come from the line of Mike Mueller. Please go ahead. Speaker 1400:53:02Yes. Hi. Just a quick one. Curious, how did the bumps that you achieved with your 2021 leasing compared to the overall portfolio average? Speaker 500:53:12Our portfolio average is up now, Mike, to right at 2.8 and the bumps that we did in 20 21 leasing, we're just over 3. So they continue to go north. Speaker 1400:53:28Got it. And then, I think earlier in the comments, you talked about a rent forecast rent growth forecast is about 10%. How does the Tier 1 coastal markets compare to that overall 10% average? Speaker 300:53:42I think you'll see The Southern California, Northern California, Northern New Jersey, probably 3x that. The Inland Empire is at 0.5% vacancy right now. I mean, those numbers are astounding. There was The proposals we're quoting, our activity and our new development pipeline is up significantly, and We're quoting proposals today with an end date, very near term end date that we need to get a response on because of how quick Operator00:54:26Our next question will come from the line of Bill Crow. Please go ahead. Speaker 1800:54:31Good afternoon. Thanks. Are you or should you be pushing up exit cap rates and underwriting given the kind of the advancement of the cycle, the increased Longer term supply deliveries, increased financing costs, etcetera, do you perceive the private market Is contemplated pushing up actual cap rates? Speaker 400:54:54This is Nick. No, I don't think so, Nat. I will tell you when we Due to our IRR analysis, we do have a 5% annual bump in our projections annually, but that's been pretty consistent over the years. The reality is on our development projects, we price the exit capital based on comps that are out there right now in the market. And yes, I know interest rates have moved up a little bit and that had some correlation to cap rates, but the other side of it is just the overall investor demand for industrial space, and that still remains quite high. Speaker 400:55:27And I think that's going to continue to keep a cap on cap rates going forward. Speaker 1800:55:34All right. And I want to throw one in from left field here, which is there was a little bit of attention focused on the industrial sector when we had The tornado disaster in the Kentucky and Indiana area, I'm just wondering whether there's been any follow-up discussions with tenants As you think about developing new buildings, whether there's any change to the structure itself that anybody's contemplating? Speaker 200:56:02Well, Bill, I'll tell you yes and no. Look, building codes change virtually every month across the country. And we're building state of the art buildings to the top coach. We deal with Earthquake issues and engineering around that, we deal with hurricane issues in Texas and South Florida So that's just a constant evolution and our construction and development people deal with that every day. Speaker 1400:56:34Okay. All right. Thanks. That's it for me. Operator00:56:40Our next question comes from the line of Anthony Powell. Please go ahead. Speaker 1900:56:45Hi, good afternoon. Just a question on the long term development Some of your peers have given either target as a percent of enterprise value or given outright numbers. How should we think about, I guess, your development start So, we're the medium to long term given kind of the overall strong environment. Speaker 200:57:04Well, Andy, I guess I would tell you that it's consistent with the FFO growth numbers that we've given. We think we've positioned the company to grow at this level for the foreseeable future. So I think you should expect us to continue To have development guidance in the range that we've given this year, the levels that we were at last year, Pre pandemic, we were well above $1,000,000,000 once before. So I think We're pretty comfortable committing that we can continue to operate at this level. Speaker 1900:57:43Got it. Thanks. And I've seen more macroeconomists Call 4 predict an inventory glut in the first half of this year as people restock, which could impact against the inventory to sales ratios that you and others quote. Do you worry about that? And if that were to be the case, what do you think it would do to medium term demand growth? Speaker 200:58:01Well, Our customers would love to get their IS ratios back up. You remember those that number typically operates between 1.4 and 1.5 And that doesn't take into account the safety stock or the increased inventories that a lot of our customers are trying to build up. So you can extrapolate from where the IS ratio is today and you're talking about $1,000,000,000,000 of additional inventories. So it's going to take us given the supply chain issues that we're all dealing with today, it's going to take us a while to get those levels back up. In spite of everything that everybody is trying, I think it's the supply chain issues are here for well into 2023. Speaker 200:58:44So it's going to take us a while. Speaker 1900:58:47Great. Thank you. Operator00:58:51Next question will come from the line of Vikram Malhotra. Please go ahead. Speaker 1500:58:57Thanks. Just two quick ones. Just With all the rent growth that you've outlined, where is the West portfolio mark to market today? Speaker 500:59:0739% on a net effective basis, And $29,000,000 on a cash basis. Speaker 1500:59:14$29,000,000 on a cash. Okay, thanks. And then just where would I I'm not asking you to give 'twenty three guidance, but if I were to sort of hypothesize and say Rent still growing, mark to market widening, occupancy flat. You arguably have maybe even more to re lease next year. Why won't same store NOI growth accelerate from current levels next year? Speaker 1500:59:39Where would you say I'm wrong? Speaker 500:59:43Vic, you broke up there. I didn't quite get that question. Could you repeat that, please? Speaker 1500:59:48So I was saying that If you look next year, you have more to lease. I know you do a lot of forward leasing, but just optically there's more to lease. Rent growth It's still there this year. So arguably, the spreads versus market like you just outlined on a cash basis are higher than what you're achieving today. So why would same store NOI growth not accelerate next year versus this year? Speaker 501:00:14Where would I be wrong with that Speaker 1501:00:15I'm not looking for a Speaker 1401:00:16specific number on this segment. Speaker 501:00:19We haven't given that guidance yet, Vic, but I don't see anything wrong with that statement. So it's your statement, Speaker 201:00:24but I don't think so. That is all crap already. It's going to wrap us about 2023 guidance. Congratulations. Speaker 1501:00:33Well, I'm the first. So, no, I was just wondering, you just outlined the cash rent to book or to To the market, so Speaker 201:00:43it seems like there's room. Yes. No, we're not going Speaker 501:00:47to say you're wrong. Speaker 1501:00:49Okay. Thanks so much guys. Speaker 201:00:50Yes. Operator01:00:54And just as another reminder, if you do have a question, please press 1 then 0 at this time. We're going to go to the line of John Kim. Please go ahead. Speaker 1101:01:03Thank you. I Just wondering with your development pipeline becoming increasingly spec, if we should think about the length of the stabilization periods extending at all. I'm looking at this quarter, your completions were 71% leased. I know demand is strong. I'm just wondering, does it take an extra few months to fully stabilize? Speaker 201:01:24Yes. I don't Speaker 301:01:25I guess I'll start and I'll tell you, I don't know that it's a fair assessment to say it will be increasingly more spec. I think it was a the Q4 was a bit of an anomaly for us. I do think as these construction Material delays impact our business overall. That may be a true statement going forward, but today I don't know that that's necessarily true. Will change much. Speaker 301:01:57Our leasing has been strong in our portfolio, and we've been leasing them on average 2 months after they put in service. And Given the pipeline today of prospects, I wouldn't see that changing for us. Speaker 1101:02:14Okay. And my second question is on Amazon and their strategy to own more of the real estate. Are you seeing a notable shift in your markets as far as buying or leasing activity? And do you think other retailers or logistic providers are going to follow suit and decide to go this Speaker 301:02:34I would tell you Amazon continues to be an Their level of activity has come down a bit from what it was in 2020 and then down to I think in 2022, we'll be down a little bit more. But that was a good thing. That was a question everyone had for our sector, what happens when Amazon slows down a bit, And we've answered that. I think on the ownership side, we've seen them more active on I heard a stat the other day, they acquired 1300 acres of land this past year, which was similar to what they had acquired the year before. I think a lot of that is being done in markets and areas that we're not necessarily going to compete with them Some of these G plus 4s that are out in tertiary locations. Speaker 301:03:25But we have look, We haven't had Amazon buy any of the assets we've sold with them in it. They've had an opportunity to do that. So I don't I can't speak for them, but I don't We haven't seen it compete with us in any market. And then in terms of other customers, not anything we're hearing from anyone trying to follow in any sort of footstep of Amazon. Speaker 1101:03:52Okay, great. Thank you. Operator01:03:57Thank you. And at this time, we have no further questions in queue. Speaker 101:04:03Thanks, Sean. I'd like to thank everyone for joining the call today. We look forward to seeing many of you throughout the year at various industry conferences as well as hopefully getting you out to physically visit some of our regional markets. Thanks Speaker 201:04:20again. Operator01:04:23Ladies and gentlemen, that will conclude our conference for today. Thank Thank you for using AT and T event services. You may now disconnect.Read morePowered by Earnings DocumentsAnnual report(10-K) Duke Realty Earnings HeadlinesLeBron's tweet goes viral after he mentions Duke and Coach K: "Just woke up from having a dream"November 11, 2024 | msn.comLeBron James reveals Duke basketball dream featuring Coach K, Snoop Dogg, Dr. DreNovember 11, 2024 | msn.comBofA: Is this the next SpaceX?Everyone is focusing on AI stocks... Yet little-known "space stocks" are rocketing to record highs with gains of 588% - 3,710%! One new space stock that I call "the next SpaceX" is preparing to IPO on the NASDAQ. Right now, you can grab Pre-IPO shares for less than $4.00. And my estimates suggest the valuation could soar 457% with the IPO. Get urgent details inside this free report...July 9 at 2:00 AM | Wyatt Investment Research (Ad)Dr. Dre's Net Worth Is 9 Figures. See Where He Invests.October 31, 2024 | investopedia.comDr. Dre Believes The Best Music Producers Have This Skill In CommonOctober 22, 2024 | yahoo.comDuke Energy raised at Mizuho, seeing post-hurricane drop as 'great buying opportunity'October 16, 2024 | msn.comSee More Duke Realty Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Duke Realty? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Duke Realty and other key companies, straight to your email. Email Address About Duke RealtyDuke Realty (NYSE:DRE) owns and operates approximately 159 million rentable square feet of industrial assets in 20 major logistics markets. 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There are 20 speakers on the call. Operator00:00:00Ladies and gentlemen, thank you for standing by, and welcome to the Duke Realty Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we'll have a question and answer session. Instructions will be given at that time. As a reminder, today's call is being recorded. Operator00:00:18I'd like to turn the conference over to our host, Ron Hubbard. Please go ahead. Speaker 100:00:23Thank you. Good afternoon, everyone, and welcome to our Q4 year end earnings call. Joining me today are Jim Connor, Chairman and CEO Mark Denene, Chief Financial Officer Nick Anthony, Chief Investment Officer and Steve Schnur, Chief Operating Officer. Before we make our prepared remarks, let me remind you that certain statements made during this conference call may be forward looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks and other factors could adversely affect in the company's other SEC filings. Speaker 100:01:10All forward looking statements speak only as of today, January 27, 20 22, and we assume no obligation to update or revise any forward looking statements. A reconciliation to GAAP of the non GAAP financial measures We provide on this call is included in our earnings release. Our earnings release and supplemental package were distributed last night after the market closed. If you did not receive a copy, these documents are available in the Investor Relations section of our website at dukerealty.com. You can also find our earnings release, supplemental package, SEC reports and an audio webcast of this call in the Investor Relations section of our website. Speaker 100:01:51Now for our prepared statement, I'll turn it over to Jim Connor. Speaker 200:01:56Well, thanks, Ron, and good afternoon, everyone. Let me start by saying that 2021 was another outstanding year for Duke Realty. We met or exceeded all of our 2021 goals, including our revised guidance throughout the year. We also capped off the year with an excellent Q4 from an operational and financial perspective That sets us up for a great 2022 and beyond. So let me recap a couple of highlights from our outstanding year. Speaker 200:02:22We signed over 33,000,000 square foot of Leases, which is an all time method for us. We concluded the year with our in service portfolio at 98.1 percent leased, A company record and particularly impressive as it includes the delivery of 7,700,000 square feet of development projects in 2021. We renewed 75% of our leases or 90% when you include immediate backfills. We attained 35% GAAP rent growth and 19% cash rent growth on 2nd generation leases for the full year, respectively, both all time records for us. We have same property NOI on a cash basis at 5.3%. Speaker 200:03:05We placed $1,000,000,000 of developments in service that were originally 39% leased at start dates, but are now 90% leased with a value creation of 69%. We commenced $1,400,000,000 in new developments across 33 projects, which was another all time record. 61 percent of those projects were in coastal Tier 1 markets. We completed $1,100,000,000 of property dispositions and $542,000,000 of acquisitions. We raised $950,000,000 in green bonds with 10 year terms and an average coupon of 2% and we increased our annual common dividend by 8.9%. Speaker 200:03:46And finally, we've continued to run our company in the most responsible manner with our ESG culture and our numerous corporate responsibility achievements, including our significant carbon neutrality goals, which were announced in November. So now let me turn it over to Steve to cover operations for the quarter and touch on some market fundamentals. Speaker 300:04:06Thanks, Jim. I'll first touch on overall market fundamentals. 4th quarter demand was exceptional in the logistics sector with With 122,000,000 square feet of absorption, about similar to last quarter and the 3rd highest quarter on record. Demand exceeded supply by about 40,000,000 square feet, which dropped national vacancy rates to an all time record low of 3.2%, which which is over 300 basis points below long term historical averages. For the full year, demand was 433,000,000 square feet compared to completions of 268,000,000 feet. Speaker 300:04:43Lease activity was robust in nearly all user groups, with e commerce, 3rd party logistics and retail representing the largest segments in the market as a whole, as well as in our own portfolio. National Asking rental rates rose again in the 4th quarter, up 11% over this time last year. We see this trend continuing into 2022 with nationwide market rent growth on average expected to be around 10%. The reaction to supply chain bottlenecks continues to be in the early stages of a longer term boom for our sector. CBRE recently reaffirmed the just in case inventory restocking strategy will be a significant contributor to Consumer spending growth and the continued secular growth in online shopping are driving much of this demand. Speaker 300:05:42For the current year, we expect that demand The current supply pipeline is not located in our submarkets. Turning to our own portfolio results. We Excuse me, a very strong quarter by signing 8,900,000 square feet of leases with an average transaction size of 122,000 feet. Rent growth for the 4th quarter leasing was again very strong at 21% cash and 41% GAAP. We expect growth in rents on 2nd generation leasing for the foreseeable future to be very strong. Speaker 300:06:24In our portfolio, we estimate our lease mark to market to 39%. Turning to development, we had a tremendous quarter of starts, as Jim mentioned, breaking ground on 9 projects, $466,000,000 in cost. 80% of the 4th quarter development starts were in coastal Tier 1 markets and 6 of the 9 projects were redevelopments of existing site structures. Our development pipeline at year end totaled $1,400,000,000 This pipeline is 48% pre leased with active prospects to bring this number even higher in the near term. We expect to generate value creation margins in the 65% to 70% range of these projects. Speaker 300:07:06Looking forward, our prospect list for new development starts is very strong and our land balance at year end $475,000,000 with an additional $173,000,000 of covered land plays. Our current land holdings are above our levels in the last few years and consistent with what we've recently communicated as much of the land acquired late in 2021 has been under contract for several quarters. 94% of our land balance is located in coastal Tier 1 markets. We own or control land that can support roughly $1,000,000,000 of annual starts for 2 times our book basis, and on average, we've only owned this land for about 2 years. Our favorable land value will We believe we are very well positioned to continue to With that, I'll turn it over to Nick Anthony to cover acquisition and disposition activity for the quarter. Speaker 400:08:13Thanks, Steve. During the quarter, we closed on $206,000,000 $1,000,000,000 acquisitions, most notably a 470,000 square foot property in Northern New Jersey and an off market transaction as well as 3 facilities in Southern California totaling 134,000 square feet. As noted on the last call, early in the Q4, we sold a recently completed project in Columbus, Ohio, which was leased to Amazon, generating proceeds of $80,000,000 I would point out that this transaction was placed under contract in April of 2021 as part of or takeout. For the full year, our capital recycling encompassed $1,100,000,000 of asset sales and 542,000,000 of acquisitions. Combined with the development previously mentioned by Steve, this activity moves our coastal Tier 1 exposure to 43% of NOI and overall Tier 1 exposure to 68 percent of NOI. Speaker 400:09:07Also, earlier this month, we closed on the 3rd tranche of assets to our joint venture with CBRE Global Partners, for which our share of the proceeds was $269,000,000 The other dispositions expected this year are primarily individual assets across multiple markets and are projected to close primarily in the second and third quarters of 2022. Speaker 300:09:29I'll now turn Speaker 400:09:29it over to Mark to cover earnings results and balance sheet activities. Speaker 500:09:33Thanks, Nick. Core FFO for the quarter was $0.44 per share compared to core FFO of $0.46 per share in the 3rd quarter and $0.41 per share reported for the Q4 of 2020. Core FFO decreased slightly from the Q3 of 2021 as we executed a significant volume of asset dispositions during the 3rd quarter and did not fully redeploy the proceeds until late in Q4. Core FFO was $1.73 per share for the full year 'twenty one compared to $1.52 per share for 2020, which represented a 13.8% increase. FFO as defined by NAREIT was $1.65 per share for the full year 'twenty one compared to $1.40 per share for 2020. Speaker 500:10:20AFFO totaled $589,000,000 for the full year 'twenty one Compared to $517,000,000 in 2020 $148,000,000 for the Q4 of 'twenty one, Our annual results represented 11.6% increase to AFFO on a share adjusted basis compared to 2020. Same property NOI growth on a cash basis for the 3 months 12 months ended Twelvethirty Onetwenty 1 was 5.2% and 5.3% respectively. I would like to point out that we continue to generate substantial NOI and FFO growth Outside of our same property pool as net operating income from non same store properties was 17.6% of total net operating income for the quarter. Same property NOI growth on a net effective basis was 3.9% for the 4th quarter and 4.5% for the full year 2021. As Nick mentioned, we closed on the 3rd tranche of our contribution to our JV with CBRE Global earlier this month. Speaker 500:11:21We'll use the proceeds of this contribution along with mortgage financing proceeds received from the JV, both of which totaled just over $300,000,000 To fund the redemption next month of our $300,000,000 3.75 percent unsecured notes, which were originally scheduled to mature in December of 2024. After this transaction closes, we will have no significant debt maturities until 2026 and ample liquidity to fund our growth. Looking into 2022, yesterday we announced the range for 20.22 core FFO per share of $1.87 to $1.93 per share with a midpoint of $1.90 representing a 9.8% increase over 'twenty one results. We also announced growth in AFFO on a share adjusted basis to range between 8.4% and 12.3% with the midpoint of 10.4%. Same property NOI growth on a cash basis is projected in the range of 5.4% to 6.2%. Speaker 500:12:21In addition to realizing a full year of the impact Rental rate growth on leases we executed in 2021, we continue to expect strong rental rate increases in 2022. While on the surface it seems we have abnormally low lease expirations, we typically re lease significantly more than is contractually set to roll with some pull forwards of future expirations. For instance, a year ago, our expiration schedule said we had 7% expiring in 2021, but we actually rolled over 12%. And in fact, in this environment, our customers and their brokers have been actively approaching us for early renewals. We expect proceeds from building dispositions in the range of $600,000,000 to $800,000,000 and we have targeted assets with long lease terms and low annual rental escalations in our disposition strategy for the year. Speaker 500:13:10Development starts are projected in the range of $1,200,000,000 to 1,400,000,000 with a continuing target to maintain the pipeline at a healthy level of pre leasing. Our 22 development plans include a significant component of speculative projects in Take advantage of the continued rental rate increases in those markets. More specific assumptions and components of our 2022 guidance are available in the 2022 range of estimates document on the Investor Relations website. Now, I'll turn it back over to Jim for a few final comments. Speaker 600:13:47Thank you, Speaker 200:13:48Mark. In closing, I'd like to reiterate what a great year 2021 was for Duke Realty. As I noted at the outset, we exceeded all of our beginning of the year As we look ahead into 2022, all of the demand drivers remain exceptionally strong. Demand is We'll continue to see the added value created by our dominant development platform. As Mark noted, the midpoint of our FFO and AFFO guidance is roughly 10% over 2021, which is a level of growth We believe we should be able to achieve on a consistent basis for the foreseeable future with our platform and the current market fundamentals. Speaker 200:14:36Finally, I'd be remiss if I didn't thank all of my colleagues at Duke Realty for all their hard work and dedication that allowed us to achieve the level of success we have. I also want to thank all of our investors for their continued support and the recognition of our good stewardship of their invested capital. Now we'll open it up for questions. I would ask that you limit your questions to 1 or perhaps 2 short questions. And of course, you are always welcome to get back in the queue. Speaker 200:15:05Okay? Operator, we'll now take questions. Operator00:15:08Thank you. Our first question will come from the line of Nick Yuriko, please go ahead. Speaker 700:15:20Thanks. Hi, everyone. In terms of the development starts, maybe you can just give us a feel for what's driving The range of starts this year, which is actually a bit lower than last year, what is the thought process there? And what would be a situation where you would Get even more comfortable increasing your development starts. Speaker 200:15:41Thanks, Zach. I'll start off and then Steve can give you some color. I would say it's 2 things. We've always had a solid build to suit pipeline. And I think if we can continue to do a number of those large build to suits like we have, I would see us Work towards the high end of our guidance. Speaker 200:16:04And the other thing ties back to our leasing. If we can continue to lease at the levels we have In 2001, I think we can accelerate speculative development as well. And I think that would push us up to the high end or I don't know, Steve, if you have any additional color you want to add? Speaker 300:16:22Yes. Nick, I would just say, I mean, you look back at last year, Our budget going into the year was in the $850,000,000 range. We did $1,400,000,000 I mean, we had a very strong year in 2021. I think heading into 22, we feel very good about our prospects, but part of it is getting our getting out of the right sites and title and getting them started. The demand picture is strong. Speaker 300:16:47It's more about being able to find the opportunities to get them started. Speaker 700:16:53Okay, thanks. Just a follow-up on development pipeline and the margin that you're citing. How should it which went up versus last quarter, cap rates down, but yields compressing a bit on Development, new starts, I mean, how should we just think about that dynamic going forward about where cap rates can move, where development yields are penciling out over the next year? Speaker 400:17:20Hey, Nick, this is Nick from Sprig Realty. I think we continue to see very strong rent growth In the markets that we're focused on and I think as long as we can continue to see that rent growth that will continue to help us achieve The above normal margins that we've been achieving historically. Yes. Speaker 500:17:38And I would just point out, Nick, that a little bit of the decrease in the stabilized yield in the pipeline from last quarter to this It's really a market mix situation. We placed some assets in service that were in Lower barrier markets with higher yields and replace that with new developments in more coastal markets that The initial yield may be a little lower, but it's a market mix. The value that we're creating actually went up. Speaker 200:18:05Yes. And I Speaker 400:18:05would tell you on cap rates, I mean, even though We still have not seen any increase in cap rates even with interest rates going up. Still very strong investor demand out there, and Speaker 800:18:19we expect that to continue for the foreseeable future. Speaker 700:18:22Okay. Thanks, guys. Appreciate Speaker 200:18:24it. Thank Operator00:18:27you. Our next question then will come from the line of Jamie Feldman. Please go ahead. Speaker 900:18:33Great. Thank you. I guess, I know you touched on it a little bit, but can you just talk about more about the kind of big picture supply story? I mean, you see some of the projections coming out of the brokerage firms in 400,000,000 or 500,000,000 square foot range for the U. S. Speaker 900:18:48This year. Just How should we be thinking about the risk of the cycle ending early or just the exposure in your markets or Just thinking about the largest pieces of that? Speaker 200:19:02Jamie, we see the same data that you do. And we've been hearing these Same stories for the last several years. And I think there's a pretty substantial disconnect to this projected supply number and actual annual completions. And I'm sure the devil is in the detail on how some people count in terms of announced projects as opposed to actually really started projects. But I think in today's world, the rising cost Of building materials, the rising cost of land, the increased level of difficulty to get sites entitled And out of the ground, is placing, if you will, an artificial damper on new supply. Speaker 200:19:48So while everybody Saying supply and demand will be equal. I wouldn't be surprised if we were here a year from now and we'd had another year like this where demand exceeded supply Simply for those reasons I cited earlier. Speaker 900:20:02Okay. And then we keep hearing about for the supply we're seeing or that's being built and some of it's in more tertiary submarkets. What's your thought on that being competitive Putting pressure on rents in your portfolio or for your development projects. Are you seeing a real difference in pricing across different submarkets in the same market? Speaker 300:20:25No, Jamie, I'll start. I would tell We're not seeing big variations between submarkets in the markets We're in, I mean, when you look at the under construction pipeline, I mentioned that 65% of it is not in Either markets or submarkets we operate in, Phoenix is an area that's got a lot of construction going on right now. We're not in that market. Greenville, right? Memphis, San Antonio, a lot of these markets that we don't own a property in that have big supply numbers. Speaker 300:21:05In terms of the markets that we own property in, the 19 markets we're in, I would say Houston is probably the one that we've talked about on a number of these calls that continues to be a little soft and not one that We will be starting to building in anytime soon. Speaker 900:21:28But I guess Even within your the markets you are in where there is supply, you think rents are kind of constant across submarkets? Speaker 300:21:36Yes. I mean, it varies, right? You've got it's jumping all over, but you've got no, I mean, in markets we're in, We're seeing strong rental growth. I mean, obviously, we put up record numbers for ourselves this year. I think we went into this year Into 'twenty one, thinking that market rent growth in the U. Speaker 300:21:55S. Was going to be in that mid single digits to maybe pushing double digits, and we were wrong again, and it ended at 11 And I think it's set up to do the same thing in 2022. Speaker 900:22:08Okay. All right. Thank you. Operator00:22:12Our next question will come from the line of Ki Bin Kim. Please go ahead. Speaker 1000:22:17Thanks. Congrats to another great year. Just wanted to stick with the development topic. With the total value notching down just a little bit, But if you think about the inflation that we've seen, it probably implies that the square footage or a number of projects that you're actually projecting to start on is lower than the dollar value. So can you just talk about that part of it and what yields you're expecting for your 2022 start? Speaker 200:22:45Go ahead, Steve. Speaker 300:22:47Sure. Stephen, it does depend on where we end up That range, right? But I think it's safe to say that we'll do somewhere between 8,000,000 to 10,000,000 square feet of new development starts. As Jim or Mark alluded to early on, part of it is that the demand picture looks really good for us. We've got a number of large projects we're working on, but it depends on some of that pre leasing and how much risk we want to take on. Speaker 300:23:17And in In terms of returns, our stabilized returns, again, I think will be a little dependent on market mix. But Assuming we're consistent with 60% to 75% in our high barrier markets, I think the returns in the low 5 Stabilize is probably a reasonable expectation, and I think our value creations, considering where cap rates are, are still going to be Healthy as they are today. Speaker 500:23:48Yes. The only other thing I would point out, Ki Bin, is you're right on. I mean, I think If you do theoretically the same dollar value development this year that you did last year, on a cost per square foot basis, it's going up, Right. So you're probably developing less square feet because costs are going up, but part of it is also market mix once again, right. It's we're going to do smaller buildings per se per dollar per square foot in these coastal markets, which is where more of our Development continues to take place. Speaker 1000:24:24Got you. And on a separate topic, where do you think we are in terms of the structure builds out to support e commerce growth. And I'm curious if you think 2021 was a kind of pull forward demand year and if the next couple of years look a little bit more normalized. Speaker 200:24:43Well, Let me answer both of those. We've been asked a number of times in a number of different ways about how the infrastructure bill and infrastructure spending is And I've told people that I think you have to exercise reasonable expectations. And The best example I can get is, remember we talked about the expansion of the Panama Canal for years and it took many years for it to get done and Complete and fully operational before we started to see the effect. So I think the legislation is still less than, what, probably 90 or 120 days old. You got to get projects approved and funded and started before you're going to see that. Speaker 200:25:27So I think it will be several years before we'll see the full impact of that. So, I think that's the that was the first question. And what was the second part of your question, Ki Bin? Speaker 1100:25:39So, I was actually Speaker 1000:25:40talking more about The warehouse network build out for e commerce, not the infrastructure bill, and where we are in terms of innings. And if you think 2021 was like a pull forward year where Maybe 2022, 2023 looks a little bit more normalized. Speaker 500:25:54Well, I would tell you, Speaker 200:25:55I think we believe 2020 was a full forward year. And I think if you look at some of the big Players in e commerce and the traditional retailers that have moved very strong into e commerce, Their numbers for 2021 were down over 20. And I think these are somewhat more normalized years that we're in, but I think everybody believes we're still in the early innings in terms of the development of fulfillment centers and e commerce supply Last mile facilities for e commerce retailer as well as our traditional customers like FedEx and UPS Continue to grow dramatically. So I think we're in the early innings. I think you'll continue to see some ups and downs with different aspects of business, I think we're going to continue to see that sector grow at a very healthy rate. Speaker 1000:26:48Okay. Thank you. Operator00:26:52Our next question then will come from the line of Dave Rodgers. Please go ahead. Speaker 600:26:56Yes. Good afternoon, everybody. Obviously, the financial guidance you gave is pretty bullish for The year ahead and I think largely expected by The Street, it seems like and maybe we've all touched on it a little bit, the investment guidance is much More conservative, lower acquisitions, lower dispositions, lower development starts than kind of where you were last year. But I guess I wanted to understand that more and even Mark's Comments about using asset sales to pay off debt as opposed to kind of growing and shrinking the balance sheet versus growing it. So I guess I want to understand, is there something that you're worried Do you have the ability to take development starts to $1,700,000,000 with the combination of land, entitlements, labor, Steel or are there some natural barriers right now that you're coming up against in terms of being able to invest more capital more aggressively given the low vacancy rate? Speaker 200:27:45Well, let me start off and then others can chime in. No, we're not we don't have any barriers. And I think if you look at where we started the year with guidance in 2021 of $850,000,000 and where we ended up the year, I think those possibilities exist. As I said earlier about the development pipeline, it's a function of some of the bigger build And how many of those we signed during the year that would push us towards the higher end of guidance or to exceed our Initial guidance, much like we did last year and then its continued leasing volume and the ability for us to accelerate more speculative development in most of those markets. We've ramped up our land holdings to support a significantly larger development pipeline going forward. Speaker 200:28:35And I think we've indicated that we're going to continue to be actively buying land. So no, we're not there's no hidden message. We're not managing. I think this is probably pretty Consistent, good, strong, but prudent guidance. And I hope to have the opportunity to tell you over the course of 2022 that we intend to raise Speaker 500:28:56Yes, David, I would just add to your specific point on asset sales to pay the debt off that I Did refer to. That's really a temporary thing. It's not like we went out and sold assets to pay back debt or to buy back debt early. That was really just to keep from having a bunch of cash sitting on our balance sheet here in the Q1. The way we look at that, it just frees up our balance To do even more debt now to fund this growth that Jim just went through without deteriorating our balance sheet. Speaker 500:29:26So that was really more just a temporary use of cash. Speaker 400:29:29Yes. And then lastly, Dave, I would add on the acquisition side, I think last year we had a midpoint guidance of about $400,000,000 We did like $530,000,000 or 540, Acquisitions are tough. You just it depends on what the opportunities are. And frankly, most of the majority of our growth is going to be through development because we like the risk adjusted returns there better than the acquisitions. Speaker 600:29:53Great. And then Nick, maybe just staying with you for a follow-up on the cap rates for acquisitions and dispositions, realizing they're relatively small, but it's about 100 and And dispositions realizing they're relatively small, but it's about 120 basis point spread between acquisitions and dispositions last year. There was a lot of In's and out, and it seems like this year might have some skew as well. But can you talk about that spread in 2022? And maybe kind of what that normalizes That looks like ex Amazon. Speaker 400:30:16Yes, I think those spreads will continue to be about the same. What I would point out though is The total returns or the IRRs, the spreads have expanded in the last 18 months. And for 2021, we calculated the spread at about 2 50 bps that our acquisition IRRs were Operator00:30:49Our next question will come from the line of Caitlin Burrows. Please go ahead. Speaker 1200:30:55Hi there. I guess, good afternoon. I guess, as you guys look at occupancy, you ended the year almost 98% occupied, And it seems like you generally expect that to stay flat or even increase at the mid or high end of your guidance. So just wondering if you can give some current thoughts on Kind of ideal occupancy and recognize that not necessarily the key metric, but how occupancy that high makes you comfortable that you are indeed getting the strongest rent growth and same And why growth is that possible? Speaker 500:31:24Well, I'll start, Caitlin. I mean, I quite frankly, I like 100 percent occupancy. Jim is always talking about 96 or 97 and having some room, but as long as we're getting the best rents we can get, why wouldn't you want a lot of occupancy I think I just go back and I look at you look at our rent growth that we posted, and I think we'll be at or near the top of our peer group. So As long as we're posting rent growth numbers that are at or near the top of our rent growth peer group, I'm sorry, having high occupancy levels is a good thing. From a same property perspective specifically, and we don't really give guidance on same property occupancy, But I could actually see that even pick up a little bit, not a lot, but maybe 20 basis points to 30 basis points from 'twenty one to 'twenty two. Speaker 500:32:11And being that kind of low to mid-ninety eight percent range, and that's really what we're projecting. We don't have a lot of expirations like I pointed out in our prepared remarks, but we will likely roll more of our portfolio than what's expiring, but that doesn't do anything in the occupancy, right. It's just keeping Tenants in there and it's getting to that rent stream even quicker. Speaker 1200:32:35Got it. And maybe just a Quick follow-up on kind of leasing trends. I know last quarter you guys gave some impressive stats on how lease spec Properties were when they went into service at 90% and that the average lease up time since 2019 of your expected elements had been under 2 months from having been placed in service. So just wondering, I know it's only been a quarter, so they don't move that drastically that quickly. But Wondering if you have any reason to believe that, that lease up timing could begin to take longer or if that's just Speaker 400:33:06not much of a problem? Speaker 200:33:07No. I would say Speaker 500:33:08as we sit here today, it's still pretty much right on the timing, I guess, that we've been at the last 12 months. Like if you look, for example, At the deliveries this quarter, they were 71% leased when they went into service, but they were actually 39% leased when we started those projects. We almost kind of almost doubled the occupancy, if you will, before they were even placed in service. So we still continue, especially in markets like Southern Cal and Northern New Jersey, to lease most of these projects up before they even go on service. So, in those markets, you're looking at 0 to 2 to 3 months of lease up time on average and then in the other markets, it's maybe 6 to 9 months. Speaker 500:33:51So we continually beat our underwriting, which is 12 months. And I would say as we sit here today looking at our pipeline that we just started and what's about to come in, what we plan on starting Next couple of quarters, I think it's going to look very similar. Speaker 200:34:04Yes. The other metric that we point to is we've got In the portfolio, a little under 6,500,000 square feet of vacant space, 75% of which is not in service yet. So I think that speaks to the strength of leasing activity that teams are seeing all across the country and the opportunity is for continued outperformance in that area. Speaker 1200:34:30Yes. Got it. Thank you. Operator00:34:36Our next question will come from the line of Ronald Kamdin. Please go ahead. Speaker 1300:34:40Hey, two quick ones for me. Congrats on a great year. Just sticking to sort of the previous question on the same store NOI guidance, Yes, I think when I think about sort of the rent growth numbers that you're posting, obviously, the rent bumps are what they are, Potentially some occupancy tailwinds. When you think about why not higher, is it mostly because there's fewer leases rolling as you mentioned? Or is there anything else With free rent or anything else, we should be aware of that, that maybe is keeping that number a little bit lower? Speaker 500:35:16No, it's really roll. I mean, if you look at what I call deal quality, the rent growth we're getting, The overall rates we're getting on deals, I'll put our deals up against anybody. I think our deal quality is as good or better than anybody, any other peers out there. We do have less roll. I mean, that's a fact. Speaker 500:35:34I mean, so you got to look at on a risk adjusted return, we're very happy with the guidance we put out. But the other thing I would just tell you on roll, like I mentioned in my prepared remarks, for 2021, We were supposed to have 7% of our leases roll. We actually rolled 12%. If you look at 22%, that's in our supplemental, we're showing 5% When we're all said and done, it will probably be closer to 10% that will roll. So if you take that, you really need to take those 2 years and average them together, because you got to remember A lot of the 'twenty two same property growth will come from the 'twenty one leases we signed and only part of 'twenty two will come from the 'twenty two leases we signed. Speaker 500:36:14Some of that will affect 'twenty three. So if you average 'twenty one and 'twenty two together, we're going to call it roll 11% of our portfolio over that 2 year period At a 20% cash rent growth number that we've been posting, that's a little over 2%. You add the rent bumps to that that are embedded in our portfolio That gets you up close to 5%. Our guidance is close to 6% because the difference would be occupancy, free rent, things like that. So hopefully that kind of walks you through. Speaker 200:36:41Yes. The other thing I would add, Ron, is the upside for us is what leases we can get our hands on early, quite candidly. And at this point early in the year, I don't think Steve's guys across the country have a real good idea All of the total amount of leases we'll be able to pull forward and which ones they are, because it's early in the year and we're just in Discovery dialogue is a lot low. So depending how many we can pull forward, well, I think really dictate how close to the upper end we can get. And then Speaker 500:37:17the last point I would make circling back to, I think it was Dave Rogers' question and Nick on Dispositions and maybe being a little higher. The assets that we have targeted for disposition are assets quite frankly that we think we've really Maximize the value on them. There are some of our assets that had longer term leases in it, quite frankly lower rent bumps and we think we can get very attractive cap rates on those assets. So we can sell those where we think we've maximized the value and it really just helps our same property pool looking forward more into 2023. Those kind of items will be more of an impact on 2023, but we continue to get those lower growth assets out of our portfolio and replace them with higher growth assets. Speaker 1300:38:03Great. And then just if I could sneak in a quick one. Just on the wage expenses, Maybe can you talk about sort of what you're seeing on the ground with sort of the constructions and so forth, what you're hearing from tenants, Anything any number you could throw around it? Is it up 7%, 8% year over year would be really helpful? Thank you. Speaker 300:38:28Was that question on wages for warehouse workers or construction costs? For warehouse workers, Operator00:38:35yes. Thank you. Speaker 300:38:38I think it varies by region, but you've probably seen a 10% to 20% increase in some wages dependent on the areas. I mean, look, our customers, I think Caitlin asked a question earlier about These conversations with tenants and this is a conversation that Jim has with the operating teams quite often, which is, are we pushing hard enough? And our customers There are a lot Speaker 200:39:06of Speaker 300:39:06pressure from a bunch of different points of their business, right, between transportation costs are up significantly, Wages are up. Rent continues to be a relatively small part of the overall logistics cost. So they're facing quite a few inflationary challenges out there, but rent continues to be a small part of it. Speaker 700:39:32Thank you. Operator00:39:36The next question will come from the line of Emmanuel Korchman. Please go ahead. Speaker 1400:39:41Hey, guys. This is one for, I don't know, a combination of, I guess, Steve and Mark. You spoke about the 2021 Pullback or not pullback, but the early renewals, and then 2022, a couple of questions. When you signed leases early, so the 2022 leases that you signed that were not expiring, Do those rent bumps take place immediately? Mark, you spoke about the benefits the same store NOI, but do the new rents become effective at the end of the lease or mid lease because you're doing it badly. Speaker 500:40:12It varies, Manny. Generally, they don't take effect until the current lease ends. There are some exceptions to that, but generally they don't take place till the new lease ends or the current lease ends. Speaker 300:40:29Yes. I would agree. I would say the one exception, Manny, is some of these conversations That take place around the tenants' needs, right, whether they need something done to the building, some improvements. A lot of times, we'll redo the lease at But as Mark said, I'd say 75% of them have to do with natural exploration. Speaker 500:40:53And the only other point I would make is these are not just to be clear, we do a few, but these are not generally leases that were Expected to roll in 2 or 3 years from now. These are generally 6 to 9 month early. Speaker 1400:41:10Jim, it's Mike. Right. But Mark, I guess the point I'm making is you talk about the big benefit You have cash flow from doing them early, but we from a model perspective, from a cash flow perspective, the fact that you've signed them early in your leasing Doesn't really impact cash flows, right? So your 2022 at this point is still going to your natural lease expiration in 2022 is going to be about the same because you've just None of them 69 months early, right? From a cash flow perspective, Speaker 500:41:41you're exactly right. That's why I said you really need to average a couple of years together, because The impact what I was trying to say is the impact of a lot of the leases we signed in 2021 hit us now in 2022. So that's why you need to really take a couple of years and average them together. You're exactly right. Speaker 1400:41:58And then I think you mentioned 20% cash rental rate growth When we do that average, is that implying can we use that to imply what your 2022 rent growth is going to be? Or do you want to guide us sort of where those numbers fall out. Speaker 500:42:13Well, I think what we would say is we expect as we sit here today, we expect 'twenty two's rent growth numbers to look very similar to 'twenty one, which is called in that mid to high 30% on a GAAP basis and high teens to low 20% on a cash. So yes, it's right in that area. Speaker 1400:42:28And I think Michael had a follow-up. Speaker 800:42:30Hey, Jim, it's Bill Enderman. Just a question as you think about longer term strategic planning, Has anything changed in your mind or at the Board level about either global expansion, maybe diving deeper into the asset management business, taking advantage of all the significant capitals out there. Obviously, you did the CBRE Venture, but going deeper and then thinking about helping your tenants, you look at what Prologis is doing in their Essentials business. Does any of that start to rise up higher in your strategic thinking? Speaker 200:43:07Yes, those are I'm sorry, Michael. Those are all topics that are consistently debated in our Strategic planning efforts and at the Board effort. And We're not prepared to announce any of those, but they're all in the mix and they're all certainly things that we're talking about today. They're all things that Given our size and scale, are opportunities for us. Speaker 800:43:39So it sounds like I don't know if you're able to rank those three things, global, asset management and essentials. Which one of them would be closer to potentially going forward? Because I think your comments in the past have been, you want to be a U. S. Focused company, that's what distinguishes you relative To the peer set, you don't want to become a massive asset manager. Speaker 800:44:02You want to sort of do small direct ventures when the time needs to not put Pressure on you to sort of fill those buckets. And then the last one being essential seems like the most logical one, but I don't want to put words in your mouth. Speaker 200:44:16And I appreciate that. No, I think you're correct. The opportunity for goods and services for our customers It's very attractive and I think that presents an interesting opportunity. Back to your original 2, international, I would say sitting here today, we think we still have ample opportunity to Grow in the U. S. Speaker 200:44:43Markets and we don't need to push to international to continue to maintain the level of growth that we had last year and that we're projecting into the coming years. In terms of the asset management side, Anytime we're doing a joint venture like the CBRE 1 or any of the other joint ventures, we have we still try and keep The leasing, the management and the asset management. So it is a source of fee revenue for us even when we do some of these ventures. I think it will be a while before we were willing to take a big, big step and get purely into the 3rd party asset management business. Speaker 500:45:25Okay. I'll see Speaker 1500:45:25you in Florida. Speaker 200:45:28Looking forward to it. Operator00:45:30Our next question will come from the line of Vince Tibone. Please go Speaker 1600:45:36ahead. Hi, good morning. How are you thinking about selling individual assets versus a Portfolio deal, are you seeing any differences in pricing or investor demand for single assets versus larger portfolios? Speaker 400:45:51Vince, this is Nick. Everything is very expensive. From our perspective on the Specifically on the acquisition side, we almost exclusively most of the transactions that we're executing on are lightly marketed or off market transactions. The reality is most of the portfolio deals are going to be fully marketed. We look at them. Speaker 400:46:18We look at them off market and lively market as well. But it is very challenging in the acquisition side right now. And Fortunately, we've got a good team in place that's leveraging the local development teams to go find some of these Interesting infill assets that we can buy at pretty good yields. Speaker 1600:46:42But what about on the sell side? I mean, do you think there is a portfolio premium today for a combination of assets and So many institutions looking to get into the sector or is it still selling single assets kind of gets you the same Overall execution is a bigger portfolio on the disposition side? Speaker 400:47:01That's always a tricky question, but I would answer Yes, there is a portfolio premium on the disposition side. You saw us do that on several transactions last year. The reality is because investor demand is so strong, when you can get a bigger portfolio pull together, a lot of times you can sort of leverage that Transaction now your buyer pool is going to be smaller. So there's a balancing act there. But a lot of times you can you really push pricing on some of these bigger deals. Speaker 1600:47:35That makes sense. That's helpful color. One more for me. The book value of your development land bank is around $650,000,000 What do you think the market value of that land is today? Speaker 500:47:482x. Yes, I think that we quoted that in our prepared remarks too. Vince may not have Yes, we think it's 2x what the book basis is. Again, if you want, there's a lot of this land We've just recently put on our balance sheet, but it's been under contract in some cases for 9 months to 12 months and market values have moved quite a bit in 9 months to 12 months. Speaker 1600:48:15Got it. Thank you. Speaker 200:48:16Yes. Operator00:48:19Our next question will come from the line of Rich Anderson, please go ahead. Speaker 1700:48:23Hey, thanks. Good afternoon. So I was looking at the same store projection For 2022 at midpoint 5.8 percent same store NOI, that's a different approach than what you've done in past years. In 2020, you started 4% and ended the year at 5%. In 2021, you started at 4% and ended the year at 5.3%. Speaker 1700:48:48I'm curious if given the fact that occupancy is so elevated, do you really see that there's upside to the 5.8 In a similar manner that you've been able to produce in previous years or do you think that's a kind of a full number at this point given all those inputs and outputs? Speaker 500:49:08Well, I would answer it this way, Rich. We're comfortable with the guidance we gave, which does have some room above the 5.8, the 5.8 is the midpoint. The guidance goes all the way up to, what is it, 6.2. So I would tell you that, yes, there's definitely some fuel in So to speak, to get to that 6.2%, I'm not prepared to sit here this early in the year and tell you we're going to get there, but there is a path. Speaker 1700:49:36Like 105 percent occupancy. Speaker 500:49:39I'm sorry, Rich? Speaker 1700:49:40Never mind. I said like 105 percent occupancy, but I was Speaker 200:49:46We're trying. I'm telling you, we're trying. Speaker 1700:49:50So second question for me is, You mentioned supply demand being in balance. We've heard that a lot in the past few years, again in 2022, and that equates 10% market rent growth, which is a nice position to be in. But since demand can Shock and turn off much faster than supply. At what point does that sort of that balance Get you nervous in the sense that, okay, if supply is running X percent above demand in the national view, Do you, as a company, start to take a more cautious approach to your own development process? Speaker 200:50:30Yes, Rich, I think we would. But I think here's the fact of the matter. U. S. Vacancy is 3.2%. Speaker 200:50:37If it goes up 100 basis points to 4.2, That's where we were in 2019, and we had a pretty good year in 2019. Not quite as good as 2021, But I think anytime you've got U. S. Vacancies under 5%, it's a landlord's market and you'll continue to see us be able to put Good value creation on the development side, both from build to suit and spec and continue to grow rents. Right. Speaker 1700:51:07And Just a quick, quick follow-up on the same topic. In Northern New Jersey, we're seeing a big spike in demand and perhaps no surprise they support Manhattan as well, of course. But is there anything unique going on in Northern New Jersey that you're seeing that is particularly sort of eye popping right now? Or is there just sort of Typical good dollar performance? Speaker 200:51:32No. Steve, you can talk about our demand is pretty much broad based. I mean, I can't tell you there's one phenomenon in some industry that's driving it. Steve? Speaker 300:51:42Yes, Rich, I would just tell you, I think the biggest thing happening around any of These large population centers is I think that the whole e commerce phenomenon is an online Economy is translated to our business, right? So there was a question earlier about where we are and what inning. And I think Amazon might be in one inning and everybody else is sort of just getting done with warm ups, right? So I think that's a big part of it. I think Northern New Jersey, in particular with the demand side is, the assets that are needed today, They're more modern assets for e commerce fulfillment, and they don't have that in Northern New Jersey. Speaker 300:52:29So you're seeing the lack of opportunities for greenfield development. You got a lot as we talked about in our remarks, 6 of our 9 projects 4th quarter redevelopment, so that's causing a lot of that demand as well as a lack of available ready to go opportunities. Speaker 200:52:44Yes, I Speaker 1700:52:45mean, that's all that. I know that. I just Saw a particular spike in Northern New Jersey that caught my attention, but perhaps we could take it offline. Thanks very much guys. Operator00:52:58Our next speaker then will come from the line of Mike Mueller. Please go ahead. Speaker 1400:53:02Yes. Hi. Just a quick one. Curious, how did the bumps that you achieved with your 2021 leasing compared to the overall portfolio average? Speaker 500:53:12Our portfolio average is up now, Mike, to right at 2.8 and the bumps that we did in 20 21 leasing, we're just over 3. So they continue to go north. Speaker 1400:53:28Got it. And then, I think earlier in the comments, you talked about a rent forecast rent growth forecast is about 10%. How does the Tier 1 coastal markets compare to that overall 10% average? Speaker 300:53:42I think you'll see The Southern California, Northern California, Northern New Jersey, probably 3x that. The Inland Empire is at 0.5% vacancy right now. I mean, those numbers are astounding. There was The proposals we're quoting, our activity and our new development pipeline is up significantly, and We're quoting proposals today with an end date, very near term end date that we need to get a response on because of how quick Operator00:54:26Our next question will come from the line of Bill Crow. Please go ahead. Speaker 1800:54:31Good afternoon. Thanks. Are you or should you be pushing up exit cap rates and underwriting given the kind of the advancement of the cycle, the increased Longer term supply deliveries, increased financing costs, etcetera, do you perceive the private market Is contemplated pushing up actual cap rates? Speaker 400:54:54This is Nick. No, I don't think so, Nat. I will tell you when we Due to our IRR analysis, we do have a 5% annual bump in our projections annually, but that's been pretty consistent over the years. The reality is on our development projects, we price the exit capital based on comps that are out there right now in the market. And yes, I know interest rates have moved up a little bit and that had some correlation to cap rates, but the other side of it is just the overall investor demand for industrial space, and that still remains quite high. Speaker 400:55:27And I think that's going to continue to keep a cap on cap rates going forward. Speaker 1800:55:34All right. And I want to throw one in from left field here, which is there was a little bit of attention focused on the industrial sector when we had The tornado disaster in the Kentucky and Indiana area, I'm just wondering whether there's been any follow-up discussions with tenants As you think about developing new buildings, whether there's any change to the structure itself that anybody's contemplating? Speaker 200:56:02Well, Bill, I'll tell you yes and no. Look, building codes change virtually every month across the country. And we're building state of the art buildings to the top coach. We deal with Earthquake issues and engineering around that, we deal with hurricane issues in Texas and South Florida So that's just a constant evolution and our construction and development people deal with that every day. Speaker 1400:56:34Okay. All right. Thanks. That's it for me. Operator00:56:40Our next question comes from the line of Anthony Powell. Please go ahead. Speaker 1900:56:45Hi, good afternoon. Just a question on the long term development Some of your peers have given either target as a percent of enterprise value or given outright numbers. How should we think about, I guess, your development start So, we're the medium to long term given kind of the overall strong environment. Speaker 200:57:04Well, Andy, I guess I would tell you that it's consistent with the FFO growth numbers that we've given. We think we've positioned the company to grow at this level for the foreseeable future. So I think you should expect us to continue To have development guidance in the range that we've given this year, the levels that we were at last year, Pre pandemic, we were well above $1,000,000,000 once before. So I think We're pretty comfortable committing that we can continue to operate at this level. Speaker 1900:57:43Got it. Thanks. And I've seen more macroeconomists Call 4 predict an inventory glut in the first half of this year as people restock, which could impact against the inventory to sales ratios that you and others quote. Do you worry about that? And if that were to be the case, what do you think it would do to medium term demand growth? Speaker 200:58:01Well, Our customers would love to get their IS ratios back up. You remember those that number typically operates between 1.4 and 1.5 And that doesn't take into account the safety stock or the increased inventories that a lot of our customers are trying to build up. So you can extrapolate from where the IS ratio is today and you're talking about $1,000,000,000,000 of additional inventories. So it's going to take us given the supply chain issues that we're all dealing with today, it's going to take us a while to get those levels back up. In spite of everything that everybody is trying, I think it's the supply chain issues are here for well into 2023. Speaker 200:58:44So it's going to take us a while. Speaker 1900:58:47Great. Thank you. Operator00:58:51Next question will come from the line of Vikram Malhotra. Please go ahead. Speaker 1500:58:57Thanks. Just two quick ones. Just With all the rent growth that you've outlined, where is the West portfolio mark to market today? Speaker 500:59:0739% on a net effective basis, And $29,000,000 on a cash basis. Speaker 1500:59:14$29,000,000 on a cash. Okay, thanks. And then just where would I I'm not asking you to give 'twenty three guidance, but if I were to sort of hypothesize and say Rent still growing, mark to market widening, occupancy flat. You arguably have maybe even more to re lease next year. Why won't same store NOI growth accelerate from current levels next year? Speaker 1500:59:39Where would you say I'm wrong? Speaker 500:59:43Vic, you broke up there. I didn't quite get that question. Could you repeat that, please? Speaker 1500:59:48So I was saying that If you look next year, you have more to lease. I know you do a lot of forward leasing, but just optically there's more to lease. Rent growth It's still there this year. So arguably, the spreads versus market like you just outlined on a cash basis are higher than what you're achieving today. So why would same store NOI growth not accelerate next year versus this year? Speaker 501:00:14Where would I be wrong with that Speaker 1501:00:15I'm not looking for a Speaker 1401:00:16specific number on this segment. Speaker 501:00:19We haven't given that guidance yet, Vic, but I don't see anything wrong with that statement. So it's your statement, Speaker 201:00:24but I don't think so. That is all crap already. It's going to wrap us about 2023 guidance. Congratulations. Speaker 1501:00:33Well, I'm the first. So, no, I was just wondering, you just outlined the cash rent to book or to To the market, so Speaker 201:00:43it seems like there's room. Yes. No, we're not going Speaker 501:00:47to say you're wrong. Speaker 1501:00:49Okay. Thanks so much guys. Speaker 201:00:50Yes. Operator01:00:54And just as another reminder, if you do have a question, please press 1 then 0 at this time. We're going to go to the line of John Kim. Please go ahead. Speaker 1101:01:03Thank you. I Just wondering with your development pipeline becoming increasingly spec, if we should think about the length of the stabilization periods extending at all. I'm looking at this quarter, your completions were 71% leased. I know demand is strong. I'm just wondering, does it take an extra few months to fully stabilize? Speaker 201:01:24Yes. I don't Speaker 301:01:25I guess I'll start and I'll tell you, I don't know that it's a fair assessment to say it will be increasingly more spec. I think it was a the Q4 was a bit of an anomaly for us. I do think as these construction Material delays impact our business overall. That may be a true statement going forward, but today I don't know that that's necessarily true. Will change much. Speaker 301:01:57Our leasing has been strong in our portfolio, and we've been leasing them on average 2 months after they put in service. And Given the pipeline today of prospects, I wouldn't see that changing for us. Speaker 1101:02:14Okay. And my second question is on Amazon and their strategy to own more of the real estate. Are you seeing a notable shift in your markets as far as buying or leasing activity? And do you think other retailers or logistic providers are going to follow suit and decide to go this Speaker 301:02:34I would tell you Amazon continues to be an Their level of activity has come down a bit from what it was in 2020 and then down to I think in 2022, we'll be down a little bit more. But that was a good thing. That was a question everyone had for our sector, what happens when Amazon slows down a bit, And we've answered that. I think on the ownership side, we've seen them more active on I heard a stat the other day, they acquired 1300 acres of land this past year, which was similar to what they had acquired the year before. I think a lot of that is being done in markets and areas that we're not necessarily going to compete with them Some of these G plus 4s that are out in tertiary locations. Speaker 301:03:25But we have look, We haven't had Amazon buy any of the assets we've sold with them in it. They've had an opportunity to do that. So I don't I can't speak for them, but I don't We haven't seen it compete with us in any market. And then in terms of other customers, not anything we're hearing from anyone trying to follow in any sort of footstep of Amazon. Speaker 1101:03:52Okay, great. Thank you. Operator01:03:57Thank you. And at this time, we have no further questions in queue. Speaker 101:04:03Thanks, Sean. I'd like to thank everyone for joining the call today. We look forward to seeing many of you throughout the year at various industry conferences as well as hopefully getting you out to physically visit some of our regional markets. Thanks Speaker 201:04:20again. Operator01:04:23Ladies and gentlemen, that will conclude our conference for today. Thank Thank you for using AT and T event services. You may now disconnect.Read morePowered by