Duke Realty Corporation
Q4 2021 Earnings Call Transcript

Published: 27 Jan 2022

[Company Representatives:]

Jim Connor - Chairman, Chief Executive Officer Mark Denien - Chief Financial Officer Nick Anthony - Chief Investment Officer Steve Schnur - Chief Operating Officer Ron Hubbard - Vice President, Investor Relations

[Operator:]

Ladies 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. . As a reminder, today’s call is being recorded. I’d now like to turn the conference over to our host, Ron Hubbard. Please go ahead.

[Ron Hubbard:]

Thank you. Good afternoon everyone and welcome to our fourth quarter and year-end earnings call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien, 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 maybe 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 our business and future results. For more information about those risk factors we would refer you to our 10-K or 10-Q that we have on file with the SEC and the company’s other SEC filings. All forward-looking statements speak only as of today, January 27, 2022 and we assume no obligation to update or revise any forward-looking statements. A reconciliation to GAAP of the non-GAAP financial measures that 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 www.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. Now, for our prepared statement, I’ll turn it over to Jim Connor.

[Jim Connor:]

Thank you, Ron, and good afternoon everybody. 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 fourth quarter 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. We signed over 33 million square foot of leases, which is an all-time record for us. We concluded the year with our in-service portfolio at 98.1% lease, a company record and particularly impressive as it includes the delivery of 7.7 million 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 second generation leases for the full year, respectively both all-time records for us. Same property NOI on cash basis at 5.3%. We placed $1 billion of development in service that were originally 39% leased at start date, but are now 90% leased with a value creation of 69%. We commenced 1.4 billion in new developments across 33 projects, which was another all-time record. 61% of projects were in Coastal Tier One markets. We completed $1.1 billion of property dispositions and $542 million of acquisitions. We raised $950 million in green bonds with 10 year terms and an average coupon of 2%, and we increased our annual common dividend by 8.9%. And finally we continue 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.

[Steve Schnur:]

Thanks Jim. I’ll first touch on overall market fundamentals. Fourth quarter demand was exceptional in the logistics sector with 122 million square feet of absorption, about similar to last quarter and the third highest quarter on record. Demand exceeded supply by about 40 million square feet, which dropped national vacancy rates to an all-time record low of 3.2%, which is over 300 basis points below long term historical averages. For the full year demand was 433 million square feet compared to completions of 268 million feet. Lease activity was robust in nearly all user groups, with ecommerce, third 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 fourth 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%. 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 inventories restocking strategy will be a significant contributor to the 1.4 billion square feet of projected aggregate demand over the next five years. In addition consumer spending growth and the continued secular growth and online shopping are driving much of this demand. For the current year we expect that demand and supply will be mostly imbalance, even as larger as the under construction pipeline currently is. I’ll remind everyone on this call, we estimate about 65% of the current supply pipeline is not located in our sub markets. Turning your own portfolio results, we executed a very strong quarter by signing 8.9 million square feet of leases with an average transaction size 122,000 feet. Rent growth for the fourth leasing was again very strong at 21% cash and 41% GAAP. We expect growth in rents on second generation leasing for the foreseeable future to be very strong. In our portfolio we estimate our lease mark-to-market to be 39%. Turning to development, we had a tremendous quarter start as Jim mentioned, breaking ground on nine projects totaling $466 million in cost. 80% of the fourth quarter development starts were in Coastal Tier One markets and six of the nine projects were redevelopments of existing site structures. Our development pipeline at year end totaled $1.4 billion. 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. Looking forward, our prospect list for new development starts is very strong and our land balance at yearend totaled $475 million with an additional 173 million of covered land plays. Our current landholdings are above our levels of the last few years and consistent with what we recently communicated as much of the land acquired late in ’21 has been under contract for several quarters. 94% of our land balance is located in Coastal Tier One markets. We own or control land that can support roughly $1 billion of annual stars from the next four years as long as the demand picture remains robust, which we believe it will. It's also important to note the market value of our land we own is about 2x our book basis, and on average we’ve only owned this land for about two years. Our favorable land value will continue to support high development margins and very good long term IRRs. We believe we are very well positioned to continue to lead the logistic sector in growth through new development. With that, I’ll turn it over to Nick Anthony to cover acquisition, disposition activity for the quarter.

[Nick Anthony:]

Thanks, Steve. During the quarter we closed on 206 million of building acquisitions, most notably a 470,000 square foot property in Northern New Jersey and an off market transaction, as well as three facilities in Southern California totaling 134,000 square feet. As noted on the last call, early in the fourth quarter we sold a recently completed project in Columbus, Ohio, which was 100% leased to Amazon, generating proceeds of $80 million. I would point out that this transaction was placed under contract in April of 2021 as part of a forward take-out. For the full year our capital recycling encompassed $1.1 billion of asset sales and $542 million of acquisitions. Combined with the development previously mentioned by Steve, this activity moves are Coastal Tier 1 exposure to 43% of NOI and overall Tier 1 exposure to 68% of NOI. Also, earlier this month we closed on the third trench of asset to our joint venture with CBRE Global partners, for which our share of the proceeds was $269 million. The other disposition expected this year are primarily individual assets across multiple markets and are projected to close primarily the second and third quarters of 2022. I'll now turn over Mark to over earnings results and balance sheet activities.

[Mark Denien:]

Thanks Nick. Core FFO for the quarter was $0.44 per share, compared to core FFO of $0.46 per share in the third quarter and $0.41 per share reported for the fourth quarter of 2020. Core FFO decreased slightly from the third quarter of ‘21 as we executed a significant volume of asset dispositions during the third quarter and did not fully redeploy the proceeds until late in the fourth quarter. Core FFO was $1.73 per share for the full year ‘21 compared to $1.52 per share from 2020, which represented a 13.8% increase. FFO as defined by Nareit was $1.65 per share for the full year ‘21 compared to $1.40 per share for 2020. AFFO totaled $589 million for the full year ‘21 compared to $517 million in 2020 and $148 million for the fourth quarter ’21. 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 three months and 12 months ended 12/31/21 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 fourth quarter and 4.5% for the full year ’21. As Nick mentioned, we closed on the third trench of our contribution though our JV was CBRE Global earlier this month. We’ll use the proceeds of this contribution along with mortgage financing proceeds received for the JV, both of which totaled just over $300 million to fund the redemption next month of our $300 million, 3.75% 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 an apple liquidity to fund our growth. Looking into 2022, yesterday we announced the range for 2022 core FFO per share of $1.87 to $1.93 per share, with the midpoint of $1.90 representing a 9.8% increase over ‘21 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%, in addition to realizing the full year of the impact of 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 a normally low lease expirations, we typically released significantly more than is contractually set to roll with some pull forwards of future explorations. 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 million to $800 million and we have targeted assets with long lease terms and low annual rental escalations in our disposition strategy for the year. Development starts are projected in the range of $1.2 billion to $1.4 billion with the continuing target to maintain the pipeline at a healthy level pre-leasing. Our ‘22 development plans include a significant component of specular projects in coastal Tier 1 market, which we have consistently demonstrated a track record of quickly leasing and which we believe will allow us to take advantage of the continued rental rate increases in those markets. More specific assumptions and components of our 2022 guidance are available on the 2022 range of estimate document on the Investor Relations website. Now, I’ll turn it back over to Jim for a few final comments.

[Jim Connor:]

Thank you, Mark. 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 expectations. As we look ahead into 2022, all of the demand drivers remain exceptionally strong. Demand is expected to roughly equal supply this year, which bodes well with our continued record low vacancy, strong pricing power to drive same property NOI growth. We'll continue to see the added value created by our dominant development platform. As Mark noted, the mid-point of our FFO and AFFO guidance is roughly 10% over 2021, which is a level of growth that we believe we should be able to achieve on a consistent basis for the foreseeable future, with our platform and the current market fundamentals. Finally I'd be remiss if I didn't thank all of my colleagues at Duke Realty for all of 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 one or perhaps two short questions. And of course you are always welcome to get back in the queue. And remember the proper for Q&A is 10. Okay, operator we will now take questions.

[Operator:]

Thank you. . Our first question will come from line of Nick Yulico. Please go ahead.

[Nick Yulico:]

Thanks. Hi everyone! In terms of the development starts, maybe if you could just give us a feel for what’s drive 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 stars.

[Jim Connor:]

Thanks Nick. I'll start off and then Steve can give you some color. I would say its two things; you know 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. And the other thing ties back to our leasing. If we can continue the least at the level we have in 2001, I think we can accelerate speculative development as well. I think that would push us up to the high end or potentially give us reason to raise guidance. I don’t know Steve, if you have any additional color you want to add.

[Steve Schnur:]

Yeah Nick, I would just say, I mean you look back at last your, our budget going into the year was in the $850 million range, we did $1.4 billion of it. We had a very strong year in ’21. I think heading into ‘22 we feel very good about our prospects, but part of it is getting our the right sites and time when we are getting them started. So the demand picture is strong. It's more about being able to find the opportunities to get them started.

[Nick Yulico:]

Okay thanks. Just a follow-up on the development pipeline and the margin that you're citing. How should – which went up versus last quarter cap rates down, but yields compressing a bit on development and new starts. I mean how should we just think about that dynamic going forward about, you know where cap rates can move, where developing yields are penciling out over the next year.

[Nick Anthony:]

Hey Nick! This is Nick. You know 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.

[Jim Connor:]

Yeah and I would just point out Nick, so a little bit of the decrease in the stabilized yield and the pipeline from last quarter to this quarter is really a market mix situation. We placed some assets in the service that we are in, lower varying markets with higher yields and replace that with new developments in more coastal markets that the initial yield maybe a little lower, but it showed market mix. The value that we are creating actually went up.

[Nick Anthony:]

Yeah, and I would 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, there is still very strong investor demand out there and we expect that to continue for the foreseeable future.

[Nick Yulico:]

Okay, thanks guys. I appreciate it.

[Operator:]

Our next question will come from the like of Jamie Feldman. Please go ahead.

[Jamie Feldman:]

Great! 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 you know 400 million, 500 million square foot range for the U.S. this year. Just how should we be thinking about the risk of the cycle ending early or just you know the exposure in new market or just thinking about the largest pieces of that.

[Jim Connor:]

You know Jamie, 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 is a pretty substantial disconnect to this projected supply number and actual annual completion. And you know I'm sure the devil's in the detail of 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 buildings, materials; the rising cost of land; the increased level of difficulty to get sites entitled and out of the ground is placing a you know if you will and artificial damper on new supply. So while everybody is saying supply and demand will be equal, I wouldn't be surprised if we were here a year from now and we had another year like this where demand exceeded supply simply for those reasons I cited earlier.

[Jamie Feldman:]

Okay, and then we keep hearing about, for the supply we are seeing or that's being built, some of its in more tertiary submarkets. What's your thought on that being competitive or 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?

[Steve Schnur:]

No Jamie, I'll start. I would tell you, we are not seeing big variations between sub markets and the markets we are in. When you look at the under construction pipeline, I mentioned that 65% of it is not in either markets or submarkets we operated 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 property in that has big supply numbers. In terms of the markets that we own property in, the 19 markets we are in, I would say Houston is probably the one that we 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.

[Jamie Feldman:]

But I guess even within the market you are in, where there is supply, you think rents are kind of constant across submarkets.

[Jim Connor:]

Yeah, you got – its jumping all over, but you've got - no I mean in markets we are in, we are seeing strong real growth and obviously we put up record numbers for ourselves this year. I think we went into this year, into ‘21 thinking that market rent growth in the U.S. was going to be in that mid-single digits, to maybe push it double digits and we were wrong again, and it ended at 11%, and I think its set up to the do the same thing in ’22.

[Jamie Feldman:]

Okay. Alright, thank you.

[Operator:]

Our next question will come from the line of Ki Bin Kim. Please go ahead.

[Ki Bin Kim:]

Thanks. Congrats to another great year. I just want to stick with the development topic, with total value knocking 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 we are actually projecting to start on is lower than the dollar value. So can you talk about that part of it and what yields your expecting for your 2022 start.

[Jim Connor:]

Go ahead Steve.

[Steve Schnur:]

Sure. Ki Bin, it does depend on where we end up in that range, right. But I think it’s safe to say that we'll do somewhere between 8 million to 10 million square feet of new development starts. As Jim or Mark alluded to earlier on, part of it is that the demand picture looks really good for us. We've got a number of large projects we working on, but it depends on some of the pre-leasing and how much risk we want to take on. And in terms of returns, you know our statewide returns, again I think will be a little depended on market mix, but assuming it were consistent with 60% to 75% in our high barrier markets, I think the returns in the low five stabilize is probably a reasonable expectation and I think our value creations considering were cap rates are still going to be healthy as they are today.

[Jim Connor:]

Yeah, the only other thing that 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 are probably developing less square feet, because costs are going up. But part of it is also market mix once again, right. We are going to do smaller buildings per site per dollar per square foot in these coastal markets, which is where more of our development continues to take place.

[Ki Bin Kim:]

Got you. And a separate topic, where do you think we are in terms of the infrastructure build out to support ecommerce 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.

[Jim Connor:]

Well, let me let answer both of those. We've been asked a number of times and a number of different ways about how the infrastructure build and infrastructure spending is going to help and I've told people that I think you have to exercise reasonable expectations. 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 you know 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 are going to see that. So I think it will be several years before we'll see the full impact of that. So I think that was the first question and what was the second part of your question Ki Bin?

[Ki Bin Kim:]

So, I was actually talking more about the warehouse network build out for e-commerce, not the infrastructure build. And just where we are in terms of the innings and if you think 2021 was a pull forward year where maybe ‘22 to ‘23 looks little bit more normalized.

[Jim Connor:]

Well, I would say, I think we believe ‘20 was a pull forward year. And I think if you look at some of the big players in ecommerce and the traditional retailers that have moved very strong into ecommerce, their numbers for ‘21 were down over ‘20 and I think you know these are somewhat more normalized years that we are in, but I think everybody believes we are still in the early innings in terms of the development of fulfillment centers and ecommerce supply chain, last mile facilities for ecommerce retailer as well as you know our traditional customers like FedEx and UBS 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, but I think we're going to continue to see that sector grow at a very healthy rate.

[Ki Bin Kim:]

Okay. Thank you.

[Operator:]

Our next question will come from the line of Dave Rodgers. Please go ahead.

[Dave Rodgers:]

Yeah, 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 comment about using asset sales to pay off debt, as opposed to kind of growing and shrinking the balance sheet versus growth it. So I guess I want to understand, is there something that you're worried about? Do you have the ability to take development starts to $1.7 billion, $2 billion with the combination of land, entitlements, labor, you know 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.

[Jim Connor:]

Well, let me start off and then others can chime in. No, we are not – we don't have any barriers, and I think if you look at where we started the year with guidance to 2021 of $850 million 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-a-suites and how many of those we signed during the year, that would push of course the higher end of guidance or to exceed our initial guidance much like we did last year. And then it’s 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 and I think we’ve indicated that we are 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 guidance a few times.

[Mark Denien:]

Yeah 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 buy back debt early. That was really just to keep from having a bunch of cash in our balance sheet here in the first quarter. The way we look at that, it just frees up our balance sheet to do even more debt now to fund this growth that Jim just went through, without deteriorating our balance sheet any. So that was really more just a temporary use of cash.

[Nick Anthony:]

And then lately Dave, I would add on the acquisition side. I think last year we had a midpoint guidance of about $400 million; we did like $530 million or $540 million. Acquisitions are tough. 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.

[Dave Rodgers:]

Great! And then Nick maybe just stay with you for a follow-up on the cap rates core acquisitions and dispositions realizing they are relatively small, but it's about 120 basis point spread between acquisitions and dispositions last year. There was lots of kind of in’s and out’s 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 normalize that looks like ex-Amazon.

[Nick Anthony:]

Yeah, I think those spreads will continue to be about the same. What I would point out though is the total returns of the IRRs, the spread have expanded in the last 18 months and for 2021 we calculated the spread is about 250 bips, that our acquisition IRRs were 250 bips higher than our disposition IRR’s.

[Dave Rodgers:]

Great! That's helpful. Thank you.

[Operator:]

Our next question will come from the line of Caitlin Burrows. Please go ahead.

[Caitlin Burrows:]

Hi there! Good afternoon. I guess as you guys look at occupancy and ended the year almost 98% occupied, and it seems like you generally expect that to stay flat or even increase that net or high end to 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 store NOI growth. Is that possible?

[Mark Denien:]

Well, I’ll start Caitlin. I mean I quite frankly, I like 100% occupancy. Jim's always talking about 96% or 97% and having some room, but as long as we are getting the best rents we can get, why wouldn’t you want a lot of occupancy too. You know 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 you know at or near the top of our peer growth. So as long as we are 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, 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 to 30 basis points from ‘21 to ‘22 and you know be in that kind of low to mid 98% range, and that's really what we're projecting. We don’t have a lot of explorations 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 to the occupancy, right. It’s just keeping tenants in there and it’s getting to that rent stream even quicker.

[Caitlin Burrows:]

Got 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 sector properties when they went into service at 90% and that the average lease of timing since 2019 of your expected developments had been under two 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 of time could begin to take longer or if that's not much of a…

[A - Jim Connor:]

No. I would say as 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 the project. So you know 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 even going to service. So you know in those markets you’re looking at zero to two to three months of lease up time on average, and then in the other markets it's maybe you know six to nine months. So we continually beat our underwriting, which is 12 months. 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 in the next couple of quarters, I think it's going to look very similar.

[Mark Denien:]

Yeah, the other metric that we point to is we've got in the portfolio a little under 6.5 million square feet of vacant space, 75% of which is not in service yet. So I think that speaks to the strength of the leasing activity that teams are seeing all across the country, and the opportunity as for continued out performance in that area.

[Caitlin Burrows:]

Yeah. Got it, thank you.

[Operator:]

Our next question will come from the line of Ronald Kamdem. Please go ahead.

[Ronald Kamdem:]

Hey! Two quick ones for me. Congrats on a great year! Just sticking to sort of the previous question on the same store NOI guidance, you know I think you – 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 tail winds. When you think about why not higher, is it mostly because there's fewer leases rolling as you mentioned or is there anything else you know with free rent or anything else we should be aware of that maybe is keeping that number a little bit lower.

[A - Jim Connor:]

It's really roll. I mean if you look at what I call deal quality, the rent growths we’re getting, you know 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 of our peers out there. We do have less roll, I mean that's a fact. I mean so you got to look at on a risk adjusted return we’re very happy with the guidance we put out, but you know the other thing I would just tell you on the roll, like I mentioned in my prepared remarks, for ‘21 we were supposed to have 7% of our leases rolled, we actually rolled 12%. If you look at ’22, that’s in our supplemental, we’re showing 5% roll. When we’re all said and done it’ll be probably be closer to 10% that we’ll roll. So if you take that, you really need to take those two years and average in together, because you got to remember, a lot of the ‘22 same property growth will come from the ‘21 leases we signed and only part of ‘22 will come from the ‘22 leases we signed. Some of that will affect ’23. So if you average ‘21 and ‘22 together, we're going to call that roll 11% of our portfolio over that two 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 you know occupancy, free rent, things like that. So hopefully that kind of watch….

[Mark Denien:]

The other thing I would add Ron is the upside for us is you know what leases we can get our hands on quite candidly, and you know at this point early in the year I don't think Steve’s guys across the country have a real good idea. The total amount of leases we’ll be able to pull forward and which ones they are, you know because its early in the year and you know we’re just in you know discovery dialogue with a lot of those. So depending how many we can pull forward will I think really dictate you know how close to the upper end we can get.

[A - Jim Connor:]

And then the last point I would make, circling back to I think it was Dave Rodgers question to Nick on dispositions maybe being a little higher. You know the assets that we have targeted for disposition, our assets quite frankly that we think we've really maximized the value on them. There are some of our you know 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 ’23. You know those kind of items will be more of an impact on ’23, but we continue to get those lower growth assets out of our portfolio and replace them with higher growth assets.

[Ronald Kamdem:]

Great! 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 constructions and so forth; what your 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.

[A - Jim Connor:]

Was that question on wages for warehouse workers or construction costs?

[Ronald Kamdem:]

For warehouse workers, yeah, thank you.

[A - Jim Connor:]

I think it varies by region, but you know you've probably seen a 10% to 20% increase in some wages dependent on the areas. You know I mean look, our customers – I think Caitlin asked a question earlier about these conversations with tenants and you know this is the conversation that Jim has with the operating teams quite often, which is are we pushing hard enough and our customers are under a lot of pressure from a bunch of different points of their business, right. Between transportation costs are up significantly, wages are up, you know rent continues to be a relatively small part of the overall logistics costs, so you know – they are facing quite a few inflationary challenges out there, but rent continues to be a small part of it.

[Ronald Kamdem:]

Thank you.

[Operator:]

Next question will come from the line of Emmanuel Korchman. Please go ahead.

[Emmanuel Korchman:]

Hey guys! This is one for, on a combination I guess Steven and Mark. You spoke about the 2021 pull back or not pull back, but the early renewals and then 2022 a couple of questions. When you sign leases early, so the 2022 leases that you signed that were not expiring, did those rent bumps take place immediately? Mark, you spoke about the benefits of same sort NOI, but do the new rents become effective at the end of the lease or mid-lease because you’re doing them early?

[A - Mark Denien:]

It varies Manny. Generally they don't take effect until the currently lease ends. There are some exceptions to that, but generally they don't take place till the new lease end or the current lease ends.

[Steve Schnur:]

Yeah, I would agree. The one exception there Manny is you know 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 that point in time, but as Mark said, I'd say 75% of them have to do with natural expiration.

[A - Jim Connor:]

And 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 two or three years from now. These are generally six to nine months early.

[Emmanuel Korchman:]

Jim you might be right, but Mark I guess the point I'm making is you talk about the big benefits to cash, you know cash flow from doing them early. From a model perspective, from a cash flow perspective, the fact that you’ve signed them early and they are in your leasing steps, it doesn’t really impact cash flows right. So your 2022 at this point is still going to be – your natural lease expiration in 2022 is going to be about the same, because you've just done them six to nine months early, right? From a cash flow perspective you’re still thinking about….

[A - Mark Denien:]

But that's why I said you really need to average the couple of years together, because the impact – what I was trying to say is, the impact of a lot of the leases we signed a ’21, hit us now in ’22. So that's why you need to really take a couple of years in average on the go; you’re exactly right.

[Emmanuel Korchman:]

And 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 ‘22 rent growth is going to be or do you want to guide us to sort of where those numbers fall out?

[A - Mark Denien:]

Well, I think what we would say is we expect – as we say here today we expect ‘22’s rent growth numbers to look very similar to ’21, which is called in that mid to high 30% on a GAAP basis and high teens to low 20 on a cash. So yeah, it’s right in that area.

[Operator:]

And I think Michael had a follow-up.

[Michael Bilerman:]

Hey Jim, its . 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, you know maybe diving deeper into the asset management, taking advantage of all the significant capitals out there. Obviously you did the CBRE venture, but going deeper and then really thinking about helping your tenants look at what lodges is doing in their centrals business. Does any of that start to rise up higher in your strategic thinking?

[Jim Connor:]

Those are – sorry Michael, those are all topics that are consistently you know debated in our strategic planning efforts and at the border effort, and you know I – we’re not prepared to announce any of those, but you know they are all in the mix and they are certainly things that we're talking about today. You know they are all things that given you know our size and scale are opportunities for us.

[Michael Bilerman:]

So it sounds like, I don't know if your able to rank those three things

[A - Jim Connor:]

And I appreciate that. No, I think – I think you're correct. The opportunity for goods and services for our customers is you know very attractive and you know I think that presents an interesting opportunity. Back to your original to international, you know I would say sitting here today we think we still have ample opportunity to grow in the U.S markets 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 you know into the coming years. You know in terms of the asset management side, any time we're doing a joint venture like the CBRE one or any of the other joint ventures we have, you know 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'll be a, it'll be a while before we are willing to take a big, big step and get purely into the third party asset management business.

[Michael Bilerman:]

Okay, see you in Florida.

[Jim Connor:]

Looking forward to it.

[Operator:]

Our next question will come from the line of Vince Tibone. Please go ahead.

[Vince Tibone:]

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?

[A - Nick Anthony:]

Vince, this is Nick. Everything is very expensive. You know 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, we look at them off-market and likely marketed 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 deals.

[Vince Tibone:]

But what about on the sell side? I mean, do you think there is a portfolio premium today for you know a combination of assets and just so many institutions looking to get into the sector or is it still you know sowing single assets kind of gets you the same overall execution as a bigger portfolio on the disposition side?

[A - Nick Anthony:]

That’s always a tricky question, but I would answer as yes, there is a portfolio premium on the disposition side. You saw us do that on several transactions last year. You know the reality is because investor demand is so strong, when you can get a bigger portfolio pulled 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 time you can – you really push pricing on some of these bigger deals.

[Vince Tibone:]

That makes sense. That’s helpful color. One more for me; the book value of your development land bank is around $650 million. What do you think the market value of that land is today?

[Mark Denien:]

2x.

[Jim Connor:]

Yeah, I think that we quoted that in our prepared remarks too. Vince may not have quite picked upon that. But yeah, we think it’s 2x of what the book basis is. We are going to keep a part of this, a lot of this land. We just recently put on our balance sheet. It's been under contract in some cases for you know nine to 12 months and the market value has moved quite a bit in nine to 12 months.

[Vince Tibone:]

Got it, thank you.

[A - Jim Connor:]

Yep.

[Operator:]

And our next question will come from the line of Rich Anderson. Please go ahead.

[Rich Anderson:]

Hey! Thanks, good afternoon. So you know I was looking at the same store projection for 2022 with mid-point 5.8% same store NOI. That’s a different approach than what you've done in past years. In 2020 you started at 4% and then ended the year at 5%. In 2021 you started at 4% and ended the year at 5.3%. I’m curious if given that 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?

[Jim Connor:]

Well, I would answer it this way Rich. We’re comfortable with the guidance we gave, which does have you know some room above the 5.8%. The 5.8% is the midpoint. The guidance goes all the way up to, what is it 6%? Looking at the number here, 6.2%, so I would tell you that yeah, there's definitely some fuel in the tank so to speak to get to that 6.2%. I'm not prepared to sit here this entire year and tell you we’re going to get there, but there is that.

[Rich Anderson:]

Like 105% occupancy?

[Jim Connor:]

I'm sorry Rich.

[Rich Anderson:]

No, never mind. I said like 105% occupancy, but that was obviously…

[Jim Connor:]

We’re trying. I’m telling you, we’re trying.

[Rich Anderson:]

So the second question for me is you mentioned supply demand being in balance. We heard that a lot in the past few years. Again in 2022 and that equates to 10% market rent growth which is you know 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% above demand in the national view, do you as a company start to take a more cautious approach to your own development process?

[A - Jim Connor:]

Yeah Rich, I think we would, but I think here's the fact of the matter. U.S. vacancy is 3.2%. If 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. You know not quite as good as 2021, but you know 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-a-suite and spec and continue to go around.

[Rich Anderson:]

And just a quick, quick follow up on the same topic. In Northern New Jersey we're seeing a big spike in demand and this is 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 soft dollar performance.

[A - Jim Connor:]

You can talk about work – 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?

[A - Steve Schnur:]

Yeah, Rich I will just tell you. I think the biggest thing happening around you know any of these large population centers is you know I think the whole e-commerce phenomenon is and online economy is translating to our business, right. So there was a question earlier about where we are, in what inning and you know 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 you know Northern New Jersey, in particular with the demand side is you know the assets that are needed today. You know they are more modern, more modern assets for e-commerce fulfillment and they don’t have that in Northern New Jersey and so you're seeing the lack of opportunities for Greenfield development, you got a lot you know. As we talked about in our remarks, six of our nine projects in the fourth quarter redevelopment, so that's causing a lot of that demand as well as the lack and available, ready to go opportunities.

[Rich Anderson:]

Yeah, I understand all that, I noticed 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.

[Operator:]

Alright. Our speaker today comes from the line of Mike Mueller. Please go ahead.

[Mike Mueller:]

Yeah, hi just a quick one. Curious how did the bumps that you achieved with your 2021 leasing compared to the overall portfolio average?

[Jim Connor:]

Our portfolio averages is up now Mike to right at 2.8, and the bumps that we did in 2021 leasing were just over three, so they continue to go north.

[Mike Mueller:]

Got it. And then I think earlier in the comments you talked about a rent forecast, rent growth forecast is about 10%. How did the Tier 1 coastal markets compared to that overall 10% average?

[Jim Connor:]

I think you'll see that 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. Those are the proposals we are quoting. You know our activity and our new development pipeline is up significantly and we're quoting proposals today with an end date of very near term end date that we need to get a response on because of how quickly rents are changing in those markets.

[Mike Mueller:]

Got it, okay, thank you.

[Operator:]

Our next question will come from the line of Bill Crow. Please go ahead.

[Bill Crow:]

Good 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 as contemplating pushing up exit cap rates?

[Nick Anthony:]

This is Nick. No, I don't think so. Now I will tell you, when we do 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 capital based on comps that are right now in the market, and yeah I know interest rates have moved up a little bit, and that has 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 and I think that can continue to keep a cap on cap rates going forward.

[Bill Crow:]

Alright. And then I want to throw one in for here which is, there is a little bit of a tension focused on the industrial sector when we had the tornado disaster in the Kentucky and Indiana area. Just wonder whether there's has been any follow up discussions with tenants or as you think about developing new village, whether there's any change to the structure itself the anybody has kind of pointed.

[Jim Connor:]

No, look Bill, I'll tell you yes or no. Look building codes change virtually every month across the country, and you know 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 and the Houston Seaboard. So that's just the constant evolution of our construction and development. People deal with that every day.

[Bill Crow:]

Alright, thanks. That’s it from me.

[Operator:]

Our next question will comes one of like of Anthony Powell. Please go ahead.

[Anthony Powell:]

Hi! Good afternoon. Just a question on the long term development start outlook. Some of your peers have given either target as a percent of an enterprise value or give out right numbers. How should we think about I guess your development starts over the medium to long term given kind of the overall strong environment?

[Jim Connor:]

Well Anthony, I guess I would tell you that its 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 a $1 billion once before. So I think we are pretty comfortable committing that we can continue to operate at this level.

[Anthony Powell:]

Got it. Thanks, and I’ve seen more macro economists call for predict and inventory go out first half of this year as people restock, which could impact to get same store sales ratio that you and others quote. Do you worry about that, and if that were to be the case, what do you think you would do to medium term demand growth?

[Jim Connor:]

Well, our customers would love to get their IS ratios backup. You remember those, that number typically operate between 1.4 and 1.5 and that doesn't take into account you know the safety stock of 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 are talking about a $1 trillion 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 awhile to get those levels back up. In spite of everything that that everybody's trying, I think it's you know the supply chain issues are here for well into 2023, so it’s going to take us a while.

[Anthony Powell:]

Alright, thank you.

[Operator:]

Next question will come from the line of Vikram Malhotra. Please go ahead.

[Vikram Malhotra:]

Thanks. Just two quick ones, just with all the rent growth that you've outlined, where is portfolio mark-to-market today?

[Mark Denien:]

39% on a net effective basis and 29% on a cash basis.

[Vikram Malhotra:]

29% on cash, okay thanks. And then just where would I – I'm not asking you to give ’23 guidance. But if I would have sort of hypothesize and say rent still growing, mark-to-market widening, occupancy flat, you arguably have maybe even more release next year. Why won’t same store NOI growth accelerated from current levels next year. Where would you say I’m wrong?

[Jim Connor:]

Vick you broke up there. I didn't quite get that question. Could you repeat that please?

[Vikram Malhotra:]

So, I was saying that, if you look next year, you have more to lease. I know you do a lot of forward leasing, but optically there's more to lease, rent growth is it still there this year, so arguably the spread versus market like you just outlined on a cash basis are higher than what you are achieving today. So why would same store NOI growth not accelerate next year versus this year. Where would I be wrong at that statement? I’m not looking for a specific number.

[Jim Connor:]

We haven’t given that guidance yet Vick, but I don’t see anything wrong with that statement. So it’s your statement, but I don’t see anything wrong with it. anybody has ever asked us about 2023 guidance, congratulations!

[Vikram Malhotra:]

Well, I’m the first so. No, I was just wondering, you just outlined the cash rent, book-to-book to portfolio market, so it seems like there is room.

[Jim Connor:]

Yeah no, we are not going to say you're wrong.

[Vikram Malhotra:]

Okay, thanks so much guys.

[Operator:]

. We are going to go to the line of John Kim. Please go ahead.

[John Kim:]

Thank you. I was just wondering with your development pipeline becoming increasingly speck, if we could think about the length of the stabilization period extending at all. I'm looking at this quarter, your completions were 71% leased. I know demand is strong and I was wondering, does it take an extra few months to fully stabilize.

[Jim Connor:]

Yeah, I well, I guess I'll start. I don't know that that's a fair assessment to say it will be increasingly more spec. I think it was – the fourth quarter 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. And I don't think our stabilization will change much. Our leasing has been strong in our portfolio and we've been leasing them on average two months after they put in service and given the pipeline today of the prospects, I wouldn't see that changing for us.

[John Kim:]

Okay 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 market 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 route?

[Jim Connor:]

I will tell you that you know Amazon continues to be an active user. Their level of activity has come down a bit from what it was in ’20 and down to ’21. I think in ’22 will be down a little bit more. But that was a good thing, that was a question everyone had for our sector, ‘what happens when the Amazon slows down a bit?’ and we’ve answered that. I think on the ownership side, we've seen the more active on acquiring land. I heard a staff the other day, they acquired 1,300 acres of land this past year, which was similar to what they 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 in; some of these G-plus floors that are out in tertiary locations. You know but we have – look, we haven’t had Amazon buy any of the assets we sold with them and 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 in terms of other customers, not anything we're hearing from anyone trying to try to follow any sort of footstep with Amazon.

[John Kim:]

Okay, great. Thank you.

[:]

[Operator:]

Thank you and at this time we have no further questions in queue.

[Ron Hubbard:]

Thanks 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 again.

[Operator:]

Ladies and gentlemen, that will conclude our conference for today. Thank you for your participation for using AT&T Event Services. You may now disconnect.