Duke Realty Corporation
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Ladies and gentlemen, thank you for your patience and standing by. And welcome to the Duke Realty Quarterly Earnings Conference Call. At this time, all participant lines are in a listen-only mode, and later there’ll be an opportunity for your question. [Operator Instructions] Just a brief reminder, today’s conference is being recorded. And I’d now like to turn the conference to Vice President of Investor Relations, Ron Hubbard.

[Ron Hubbard:]

Thank you. Good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Jim Connor, Chairman and Chief Executive Officer; Mark Denien, Chief Financial Officer; and Nick Anthony, Chief Investment Officer. Before we make our prepared remarks, let me remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you to our December 31, 2016, 10-K that we have on file with the SEC. Now for our prepared statement, I’ll turn it over to Jim Connor.

[Jim Connor:]

Thanks, Ron, and good afternoon, everyone. I’ll start out with an update on the overall business environment and then cover our second quarter results. Nationally, the industrial market regained its previous strong momentum after a more modest first quarter with demand outpacing supply by 15 million square feet. Net absorption for the quarter was 58.3 million square feet and completions totaled 43.4 million square feet. The U.S. industrial market vacancy now stands at 4.6%, which is down 40 basis points from a year ago; nationally, rents grew 6.6% compared to a year ago. We’re seeing increased construction across the country. Total supply under construction is now projected at over 200 million square feet and we anticipate that the markets will reach some level of equilibrium by early to mid 2018. I’d remind everyone that our market with supply and demand imbalance at less than 5% vacancy is still a great place to be an industrial owner. Demand was strongest in Atlanta, the Inland Empire and the Lehigh Valley with a combined 16 million square feet of net absorption for the second quarter. Most markets remain undersupplied with new construction running at less than 2% of the existing inventory. The only notable exceptions would be the Inland Empire, the Lehigh Valley and Louisville markets where construction is running at 4% to 5% of existing inventory. The drivers of this absorption are twofold. First, continue to grow and demand in consumer products, food and beverage and apparel goods, our clients with the ecommerce companies, retailers, consumer products companies and the 3PLs that serve them. Second is the structural change we’re seeing with our clients modernizing their supply chain. They continue to move to larger facilities with greater clear height to better serve today’s omni-channel distribution needs. This month, I’d also point out that consumer confidence hit a 16-year high at 121.1. While consumer spending numbers are up more modestly, this bodes well for consumption and the continued need out on bulk warehousing. Turning to our owned operating results. We’re seeing similar strength in our owned portfolio with stabilized in-service occupancy at 97.7%. The drop in stabilized occupancy of 100 basis points from the first quarter is due largely in part to the hhgregg bankruptcy, yet overall vacancy remains at a very strong level. But we note, our total in-service occupancy level when we include unstabilized assets dropped to 96% this quarter, primarily due to vacancy from recent acquisitions and recent spec developments placed in service. These unstabilized assets recently placed in service, provide us with substantial future NOI growth opportunities. As we only have 3% of our leases expiring for the remainder of the year, our focus is the lease-up of the spec space and continue to drive rent growth. During the quarter, we executed 4.6 million square feet of leases which is solid leasing activity, in light of our high occupancy and relatively low lease expirations in the portfolio. The lease activity included notable transactions with customers such as Target, Hewlett Packard, McGraw Hill and HD Supply. Turning to development for the quarter, we started a $154 million of projects across six markets including two build-to-suits. We also started two projects that were 50% pre-released and two speculative developments. One notable development was the start of the $1 million square-foot speculative facility in the Lehigh Valley at our 33 Logistics Park, a location where we’ve had great success leasing up two other speculative projects in the last 12 months with blue chip customers like Amazon and XPO Logistics. I’ll note, the XPO lease was just signed this week in the same timeframe that the speculative development was placed in service. These second quarter starts are projected to earn on average an initial cash yield of 7.2%. Our overall development pipeline at quarter end had 26 projects under construction totaling 10.9 million square feet and a projected $774 million of stabilized cost at our share that were 65% pre-leased at the end of the quarter. We expect these projects to create an approximate 24% margin in total and generate stabilized cash yield of 6.6%. Our development outlook is very solid with a pipeline of prospects across the system that is driving our increased guidance for developments, which I’ll cover later. I’ll now turn it over to Nick Anthony to cover acquisition and disposition activity for the quarter.

[Nick Anthony:]

Thanks, Jim. Big news of course is the closing of the substantial portion of the previously announced $2.955 billion sale of our medical office business at a 4.6% cap rate. During the quarter, we generated $2.45 billion in proceeds from a series of closings with the majority of the remaining closings expected in the third quarter. In addition to the second quarter closings, we earned an additional $20 million of promote income related to the sale of an MOB unconsolidated joint venture. As previously communicated, the net proceeds, the reinvest after seller financing and debt pay-downs will be redeployed opportunistically into our development pipeline and acquisitions in high barrier Tier 1 markets, balanced with the return of capital to shareholders in the form of the special dividend. Jim will discuss our revised special dividend guidance in a moment. During the second quarter, our acquisitions team was successful in sourcing two small portfolio acquisitions in South Florida and Chicago totaling $124 million. In aggregate, the acquisitions encompassed five modern bulk industrial buildings totaling 1.2 million square feet, which were on average 43% leased and are expected to earn an initial stabilized cash yield of 5%. I’ll note, as part of the Chicago portfolio transaction, we are also under contract to acquire additional 300,000 square feet spec building currently under construction at the same business park which is expected to close in the third quarter. Since quarter-end, we’ve also been able to execute on our few other opportunistic acquisitions in Tier markets. In July, we closed three acquisitions, two in Southern California and one in Northern New Jersey for a total of a $150 million. Furthermore, we have approximately $500 million of acquisitions in Southern California, Northern New Jersey and South Florida under contract. These acquisitions are subject to customary closing conditions and we expect to close them by year-end. A substantial portion of these recently closed and pending acquisitions, our recently completed speculative development projects that are in the aggregate approximately 65% to 75% leased allowing for future value creation as we execute leases in these high growth markets. As alluded to in last night’s press release, these acquisitions will be accretive to FFO and AFFO upon stabilization as the stabilized returns will be in excess of the 4.6% cap rate achieved on the medical office disposition. Also, due to the high-barrier markets where these acquisitions are located, they should provide better prospects for embedded lease escalations and future market rent growth in our medical office properties previously provided. I’ll now turn our call over to Mark to discuss our financial results and capital transactions.

[Mark Denien:]

Thanks, Nick. Good afternoon, everyone. We completed an outstanding quarter from a core operating standpoint, resulting in core FFO of $0.32 per share, which is consistent with the first quarter of 2017. Particularly, dilutive impact of selling our medical office properties which sold mostly in June will be fully realized beginning in operations for the third quarter. The sale had a negative $0.01 per share impact on FFO and AFFO for the second quarter and is anticipated to have an approximate $0.05 to $0.06 per share negative impact on FFO for the second half of the year. As we have said many times before, this dilution is temporary. Once all the proceeds have been reinvested in development projects and acquisitions with returns in excess of the cap rate we achieved in the medical office disposition and in assets with better long-term rental rate growth prospects, we should be in a position to realize outsized FFO and AFFO growth rates. We anticipate to have the proceeds fully redeployed and back to pre-transaction leverage levels by mid-2018. AFFO totaled a $103 million for the second quarter of 2017 compared to $118 million for the first quarter of 2017. The decrease from the first quarter was the result of the sale of the medical office properties in addition to an increase in lease related capital expenditures that was driven by the timing of lease commencements. We utilized a portion of the proceeds from our second quarter sales to reduce indebtedness, paying off over $930 million of debt since March 31st, which included $286 million and 6.5% unsecured notes that were scheduled to mature in 2018, our $250 million variable rate term loan, $237 million that was outstanding on line of credit on March 31, 2017, also including debt payoffs or a $129 million of 6.75% unsecured notes that we repaid in early July that were scheduled to mature in March of 2020. Of the total sales price from the quarter’s medical office dispositions, $400 million was structured as seller financing which bears interest at 4% and matures over the next three years, while another $796 million was placed in escrow accounts to finance future acquisitions and development. The remaining proceeds were used to fund development activities, $124 million of acquisitions as well as another $150 million of acquisitions completed in July. To conclude, our operating results remained very strong with the opportunity for significant increases as we reset our unstabilized properties. In addition, our debt levels are low enough that we can fund our future growth for the next 12 months or so without any equity needs and still maintain investing class leverage profile. I’ll also make one last comment on the equity markets. As announced last week and in fact yesterday morning, Duke Realty was added to the S&P 500 Index, honor to be included in this large cap equity index along with other leading public companies in U.S. We believe the execution of our strategy in the last eight years to simplify the story and have a best in class balance sheet, significantly contributed to our strong shareholder outperformance over this time period and ultimately contributed to the inclusion in the S&P 500 Index. Now, I will turn it back over to Jim.

[Jim Connor:]

Thanks, Mark. In reflection of our strong operating performance for the first half of the year which we expect to continue and given the added clarity to our MOB proceeds redeployment, we increased our FFO per share guidance by $0.03 at the midpoint. This increase is reflective of better than expected rent growth and lease-up of development completions, redeployment of sales proceeds in the development and acquisitions at a faster pace than anticipated, and strong overall operating fundamentals in excess of our original expectations. We narrowed same property NOI growth guidance to 3% to 3.8% from the previous range of 2.5% to 4.3%. This revised guidance includes an approximate 55 basis-point negative impact on the full year results from the hhgregg bankruptcy. On the hhgregg vacancies, I am pleased to report that we have leases out on two of the three vacancies with good activity on the third and smaller space. Both leases are at increased rents and additional term beyond the original hhgregg lease expiration. So, this is obviously positive news. It’s likely we will not realize substantial NOI from these spaces until 2018. The average occupancy guidance we raised to low end and narrowed the range to 96.4% to 97%, up 20 basis points from the previous midpoint. Given the strong outlook on our development pipeline, we also raised development guidance to $700 million to $900 million, up $200 million from the original midpoint. We continue to expect the pre-leasing level of this pipeline should remain above 50%. The estimate for acquisitions was also increased to a range of $700 million to $1.1 billion from a previous range of a $150 million to $900 million, reflecting the better than anticipated opportunity to redeploy proceeds in the high-barrier markets with leasing upside. Year-to-date, we have closed on $390 million of acquisitions and have approximately $500 million under contract that we expect to close by year-end. We expect the initial cash yield on these acquisitions, once they are stabilized, to exceed the 4.6% cap rate we achieved in the medical office sale. Lastly, I’ll highlight, the estimate for special dividend per share was narrowed to a range of $0.70 to a $1.15 from the previous range of $0.70 to $2 a share, primarily reflecting our increased acquisition and development volume expectations as just noted. Revisions to certain other guidance factors can also be found in the Investor Relations section of our website. In closing, I think we are very pleased with our team’s execution for the mid-year across operations and development and of course from executing the sale of our medical office platform. As everybody is aware, the medical office sale was executed at much better than expected pricing, generating increase to our NAV of roughly 5% and providing opportunities to further invest in our growth strategy and return capital to the shareholders. We’ll now open up the lines to our audience and we ask participants to keep the dialogue to one question or perhaps two very short questions. Of course, you’re welcome to get back in the queue. Thank you.

[Operator:]

[Operator Instructions] Our first question comes the line of Blaine Heck. Your line is open.

[Blaine Heck:]

Good afternoon. I just wanted to start on the acquisitions, couple of questions there. Are there any large portfolios in that $500 million you have under contract or is it smaller one-off type properties? And then, can you give us any sense of the mix of stabilized properties versus under lease developments in that number?

[Jim Connor:]

Yes. Blaine, it’s Jim. Let me give you the high level comment and Nick can give you a little bit more granular detail. The $500 million is primarily one portfolio of properties that we are buying and in aggregate, it’s about 60% leased and we’ll probably close that in a couple of tranches in fourth quarter. So, some of the buildings are stabilized and some of them have leasing upside.

[Nick Anthony:]

Yes. Blaine, this is Nick Anthony. I would say that about half of the buildings are either 100% leased or close to 100% leased and the others are vacant right now. And the reason for that is that they are currently under development and will be substantially completed probably in the next 30 to 60 days.

[Blaine Heck:]

Great. So, just a quick follow-up on that. Are the under leased developments going to go into the development pipeline as you require them or into the unstabilized in-service portfolio and thus I guess we’d see some downward pressure on occupancy?

[Mark Denien:]

Yes. Blaine, this is Mark. They’ll be completed when we buy them, so they will go right into the in-service population, the unstabilized in-service population.

[Blaine Heck:]

If you do have some downward pressure, is that included in the guidance you guys have?

[Mark Denien:]

That is included in the guidance. We’ve said that -- that’s all part of the whole -- way we look at it, the temporary dilution from the whole MOB transaction. We had $0.01 in the second quarter which is mainly sitting on cash and then $0.05 to $0.06 for the last half of the year. So, we can get the cash and fully leased. So, that downward pressure on occupancy is included in the guidance.

[Operator:]

Next, we have the line of Manny Korchman. Your line is open.

[Manny Korchman:]

As you went out looking for sort of our op properties to buy, how did you get comfortable buying properties that were under leased and sort of even if they were in primary markets, and how you thought about your sort of time to lease up versus the developer’s time to lease up?

[Jim Connor:]

Manny, it’s Jim. I’ll give you my thoughts and Nick can chime in as well. We’ve looked at lot of things. And I think the first thing is, you should know, we have passed on lot of things because as we all know, things are expensive out there. And the other side of it is, we’ve been outbid by some of our peers. So, there is a lot of activity out there. We look at every deal and every portfolio on a case by case basis. But you’ve got to remember, our portfolio is 98% leased at the end of the first quarter. So, we’ve got enough confidence in our local leasing teams with our portfolios in that good of shape. We are comfortable taking on the lease up risk. And we looked at these and thought we could get an appreciate risk adjusted return as opposed to waiting for them to be a 100% stabilized and paying an even higher price to the merchant builders. So, that’s kind of how we look at it. Nick, do you want to add any color?

[Nick Anthony:]

Yes. Manny, this is Nick. We also have been -- there are some markets that we’re looking in and acquiring assets in, are also very highly occupied, some of them are only 1% vacant. So, as you look at that, we feel like the leasing risk is not as great as it would be in some of the other markets around the country.

[Mark Denien:]

And the last thing I would add, Manny, this is Mark, is that we’re taking over leasing of those assets now that we have them under contract. And the last point would be, we’re really looking at these a lot like we would look at spec development because they really are just that, they haven’t even been placed in service yet. It’s not like they’re -- they’ve been struggling out there for a year or 18 months and can’t get them leased up, there has been no product, so.

[Manny Korchman:]

Maybe a follow-up on that, Jim. Can you quantify the amount of that savings on the risk adjusted return that you mentioned?

[Jim Connor:]

Manny, off the top of my head, it’d be pretty hard. I think consistently, we’ve seen around the country, probably somewhere between 20 and maybe 50 basis points. And part of it is depending on whether we’re buying one-off building that’s 50% per-leased or three buildings that are 0% leased. So, there’s what we consider to be a healthy premium there for taking out on that risk. And again, we’ve got people on the ground and teams that have leased their portfolios to 98%. So, I think that’s an acceptable risk for us to take on.

[Operator:]

And next, we have the line of David Rodgers. Your line is open.

[David Rogers:]

Hey, Mark, just a quick follow-up to that, in terms of the accounting of bringing on the vacancy in the assets. I mean, I assume that you’ll expense all the costs as you bring them on and not capitalize that, but I just wanted to verify?

[Mark Denien:]

That’s right, David. Day one, everything starts getting expensed because it’s an acquisition. Yes.

[David Rogers:]

And then, Jim, on the development side, I think you also expanded that, you had said in your comments. When do we see that expansion happen? Do you see any changes in kind of your targets of keeping the portfolio in the development pipeline 50 plus percent leased? I guess how much more aggressive do you get in that part of the business?

[Jim Connor:]

Well, there are two things we can do to keep it above 50% preleased, and that’s keep leasing the specs base that we started and doing build-to-suits. And I think our teams are doing a good combination of that. It fluctuates from quarter-to-quarter. In the first quarter, our build-to-suit percentage was significantly higher than in the second quarter. But I think that’s to be expected when our occupancies were as high as they were in the first quarter. So, our focus is on filling that spec space. We’re out trying to make every build-to-suit we can make that we think is accretive to the bottom-line, and it’s competitive out there and we don’t make them all but the ones we make, obviously we like and we’re comfortable with. And as long as we keep leasing up the spec space, you’ll see us be able to continue these kind of levels.

[David Rogers:]

And that ramp will occur immediately or are we going to see that more in 2018?

[Jim Connor:]

Yes, I think you’ll see that immediately in our development numbers in the second -- excuse me, in the third and the fourth quarters, to be able to get to the levels of our increased guidance. And then, in terms of 2018, our perspective is, the markets continue to look pretty good, even if we reach some level of equilibrium in early to mid 2018 on the supply demand side. You got to remember, vacancy is still sub-5%. And I think that’s a pretty good place to be and we’ll continue to fuel a lot of good development opportunities.

[Operator:]

Next, we have the line of Jamie Feldman. Your line is open.

[Jamie Feldman:]

Thank you. So, are you still pursuing more acquisition opportunities? I guess, is there a chance you’ll be able to put more capital to work, pay less of a special distribution, just what are your thoughts on what you found versus what you may still be looking for?

[Nick Anthony:]

We are still looking for acquisitions but we are from a geography perspective, very selective in some markets that we are looking at. And I would tell you that the opportunities are somewhat limited; there is not a lot of deals out there, but we will continue to look at deals, and we have some 1031 money that we could allocate to those deals, if we find the right deals.

[Jim Connor:]

Yes. Jamie, in regards to special dividend, I think we are very comfortable with the guidance we gave and just don’t see any way it’s going to be lower than the low end, I think somewhere in that range is where we are going to end up.

[Jamie Feldman:]

Okay. And then, can you give some just kind of latest thoughts on mark-to-market in the portfolio? And maybe if you look at ahead to your 2018 expirations, kind of what your latest thoughts are on what kind of -- how much that could drive same-store growth, just kind of internal growth prospects?

[Mark Denien:]

Jamie, this is Mark. Looking out over through 2018, which is kind of the time frame we look at, you’ve heard me say it’s about 18 months, give or take. We really think that as we sit here today, you’ll see rental rate growth pretty close to what we’ve been reporting the last couple of quarters, somewhere in that mid to high single digits on a cash basis and somewhere in the mid to high teens, maybe even pushing 20% on a GAAP basis. We are pretty much through with what I would call our trough leases, there is not a lot of that left but we are getting just continued substantial rent growth year-over-year and that’s what really driving that number.

[Operator:]

Next we have the line of Eric Frankel. Your line is open.

[Eric Frankel:]

Thank you. Maybe, Mark, can you maybe comment on your operating guidance, your same-store guidance specifically? Your guidance implies that you’ll have roughly 2.5% same-store NOI growth in the second half of the year, and this is -- hhgregg, what impact is that having on your guidance?

[Mark Denien:]

Yes, Eric, specific to hhgregg, it’s got about 55 basis-point impact on the full-year number and we really collected rents from those guys all the way up until June. So, didn’t have much of an impact at all in the first half of the year and even really in the second quarter. So, if you look at the last half of the year, it’s going to have about an 80 basis-point negative impact in the third and fourth quarter; that assumes no re-leasing rent come, as Jim mentioned on the call on the prepared remarks. We are hopefully close on a couple of those spaces right now but we’re just kind of conservatively estimating that by the time we actually get leases signed and the tenant in, and then paying rent that any rental we get this year will be negligible but it should be a good pickup for us next year. But it’s about 80 basis points for the last half of the year, 55 basis points for the full-year. If it wouldn’t been for that, we’ve been over 4% at the midpoint of our range.

[Eric Frankel:]

Okay. Is there anything to read into the big increase in same-store expenses this quarter?

[Mark Denien:]

No, it was really some expense true-up on real estate tax side. All of those expenses will pass through. So, it’s really an increase on the expense side and revenue, and it was really just some true-ups.

[Operator:]

And next, we have the line of Rich Anderson. Your line is open.

[Rich Anderson:]

Thanks. Good afternoon. So, Mark, I just want to make sure I understood the timing of this process. You said mid-2018, be fully redeployed and leveraged back to presale levels I think is what you said. When do you get back to -- and maybe same timeframe, but when do you get back to the earnings power of the Company being back to square one assuming that you’re taking on value add acquisitions and developments have to get lease-up and all that sort of stuff. Is that some point further on in the future or is that also mid-2018?

[Mark Denien:]

No, I think you’ll start to see a pickup, Rich, at the beginning of 2018 but we won’t be back to what I’d call a full operating levels to about mid 2018. So, when I said that mid-2018, that’s where I am looking that we’ve redeployed all the proceeds, we’ve got to the extent we’re redeploying an under-leased asset, we’ve got to lease it up because we definitely…

[Rich Anderson:]

Okay.

[Mark Denien:]

Leased up well before mid-2018. And we’ve also grown through raising our leverage back to three transaction level. So, by mid-2018, I think we’ll be full song, so to speak, on an FFO growth.

[Rich Anderson:]

So, to put it differently, you’re becoming a smaller company in theory, right, by paying a special dividend but you’re going to produce more earnings at the end of the day, from a smaller entity; is that the right way to think about this?

[Mark Denien:]

We’ll be smaller by a small amount, I guess, the way I would say it, Rich. Special dividends, we’re looking at $0.70 to a $1.10. But I think we’ll get more than that back in outsized growth because the way we’re looking at it, we’re taking $3 billion that we were earning 4.6 on and we’re going to redeploy much better lease than that when it’s all certain.

[Rich Anderson:]

I mean, that’s great, math, I am not -- I am certainly not putting you down for it. And then, the last follow-up question quickly is on the acquisitions. So, you’re finding a lot of opportunities. I mean, just humor me, I mean, how do you avoid -- or how do you answer the question that you’re not stretching beyond your means to redeploy versus what you would naturally be doing, if not for the fact that you had all these proceeds coming in?

[Nick Anthony:]

I think first of all, we’re losing several deals. So I think that says we’re not overpaying, because we’re not the sole winner on every deal. But, we have deep relationships with markets and we’ve been able to find some unique situations in these markets. There are lot of deals that we won’t look at or there is lot of deals that we will be outbid on by some of our peers.

[Operator:]

Next we have the line of Michael Carroll. Your line is open.

[Michael Carroll:]

Thanks. Nick, can you provide us a breakdown of the acquisition guidance? I am sorry, if you said this I guess early in the call. But, did you give us a percentage of acquisitions that are stabilized assets versus the ones that are that completed spec development projects?

[Nick Anthony:]

No, the acquisitions that we’re acquiring, they are about 65% leased on average. Other ones, we currently haven’t agreed that we haven’t closed, about half of those are fully occupied or substantially occupied and the others are vacant and coming on line.

[Jim Connor:]

Yes, I just think kind of point of clarification, when we’re talking about an aggregate number, that’s the stuff that we’ve closed on and the stuff that we have under contract and anticipate by the end of the year. So, it’s not -- it’s certainly not an insurmountable amount of space for us to lease.

[Michael Carroll:]

Okay, great. And then you are selling these projects, are these just developers, and what’s the premium over the cost basis that you are buying on that.

[Nick Anthony:]

Well, it’s a mix of institutional sellers and some private developers around the country.

[Michael Carroll:]

And then, what’s the premium over the cost basis?

[Nick Anthony:]

You mean over replacement costs?

[Michael Carroll:]

Yes, what they’re building for?

[Nick Anthony:]

So, I would say on average, it’s around 15%, which is typical while we receive a little bit better on our development projects. These are new developed assets.

[Operator:]

The next, we have the line of John Guinee. Your line is open.

[John Guinee:]

Okay. John Guinee here. Thank you. First, Jim Connor, I noticed here that your land plus developable land plus strategic land is down below $200 million. Did you guys take a huge impairment charge to get down below $200 million?

[Jim Connor:]

No, John. You know from past experience and you have known us for a long time, there was a time when we were about $0.50 shy of $1 billion worth of land, and that has been a strategic initiative of ours to not only sell that non-strategic land which we have just a small amount left and we have been able to monetize that and make nice gains, but our development machine is so efficient now that even though we are buying land -- we’ve bought $75 million worth of land this year, we have monetize the $100 million of land. So, one of the benefits of where we are in the cycle, is being able to have a very, very low land inventory; and yet when you buy new land, we are putting it into production. And given where we are from an outlook perspective, now it’s not the time for us to be bulking up on land. I think we will continue to be very disciplined and buy it in smaller pieces that we can put into production fairly quickly. I don’t know what inning we’re in but I think everybody would agree, we are in one of the later innings, and that will give us just a much better balance sheet to compete against in the coming years.

[John Guinee:]

And then next question, and Mark, you may have mentioned this already. But office has now essentially gone, MOB will essentially be gone in the next few months. What’s the outlook for G&A? I would expect that the G&A would be rightsizing itself. Have you given any color on that?

[Mark Denien:]

Yes. John, I think our guidance on G&A is where we expect to be this year which is pretty flat with last year. I think based on our outsized performance in some areas this year, we expect that some of the compensation plans may result in some higher pay and that’s included in that number. So, even with that increase there, we have been able to hold G&A flat. As we look forward, I would think that you may -- the way we look at it, I guess said differently, we won’t have to add any overhead to our current levels and we can probably grow another $2 billion on the industrial side. So G&A ought to be able to stay about where it is and we can continue to grow this Company.

[John Guinee:]

And then last, I can’t remember how many questions I had but special dividend to not pay a $1 special dividend, how much total acquisition volume did you have to have, how does that math work?

[Jim Connor:]

I would say that our original guidance, the high end was $2 and now our revised guidance, high end is $1.15 and that was about probably $600 million of extra volume, not just acquisitions but development because a lot of our developments -- it’s kind of complicated, but a lot of our developments can count for these 1031 exchanges as well. So, it was about $600 million of volumes to lower that.

[Operator:]

Next with the line Sumit Sharma. Your line is open.

[Sumit Sharma:]

Following up on Mr. Guinee’s question, when you are out there looking at acquiring more land or sort of planning out where else to sort of expand your development pipeline, looking into 2018 and 2019, what are the sort of criteria that you look at in terms of -- are you looking at not just the cost of land, which of course is rising but what other factors are you looking at that help you figure out the demand is coming this year, besides this year leasing data or whatever it is? I mean that’s a valid answer too, I’m just find to figure out what are you thinking.

[Jim Connor:]

Well, Sumit, it’s a combination of lot of things, and no particular order. First and foremost, virtually every market has a loose allocation of what we think they should be able to support in terms of vacant land. So, it’s what they already own or if they -- they are completely out of land, how much we think they can afford to buy from an individual business perspective. When you get down to analyzing existing sites, it’s what sub market they are in, how well that sub market’s been performing, how big the site is. One-off site that you can put one building on and have that into production, may be the same quarter that you buy it or the following quarter is a little bit more attractive than a site that you might have to work through any sort of clean-up demolition or entitlement process that in some of the markets we operate could take as much as 18 months. So, you’ve got to factor all of those things in and then make a business decision on what you think the right risk adjusted return for the ultimate development is when you are all done with the project. That’s kind of a long way of explaining all the different factors.

[Sumit Sharma:]

Just holding up on that, how much of inflation in land prices have you seen and by and large would you be able to share that with us?

[Jim Connor:]

Well, it’s an interesting question. I would tell you, I think we’ve probably seen on average, land prices up this year, probably 10% and they were probably up 10% last year. Again, it’s a combination of a lot of things. It’s the price for the land, but it is also the cost of entitlement and how many square feet of development we can ultimately get on. And that’s the onsite improvements and the offsite improvements. And as construction costs go up, the costs of those entitlements go up. Given the strength of the marketplace, there is very little incentives to be had, unless you have a very unique development project in hand with the tenants. So, you’ve got to factor all of those things in when you look at the ultimate cost of the land when it goes into the development.

[Operator:]

And next we have the line of Michael Mueller. Your line is open.

[Michael Mueller:]

So, for the acquisitions that you just closed, it looks like the in-place cap rate is nothing which is understandable because development and stabilize at about 5%. I guess when you are looking at the other 500 that’s coming on line, do you expect a similar going in yield and a similar stabilized yield? And then over what time frame period do you see taking to stabilize these?

[Nick Anthony:]

Yes. So, on the future one, I think the in-place will be a little bit higher because it’s little bit more leased. And then we expect to get those stabilized within six months. Like we mentioned earlier, we have control over leasing now on those before we actually close on them. So, we expect to make progress on leasing even before we close.

[Michael Mueller:]

And is this stabilized yield going to be similar about that size?

[Nick Anthony:]

It’ll be a little bit lower, but it’ll be similar.

[Michael Mueller:]

And last question on that, should we assume ratably throughout the balance of the year or does it feel like more is going to be at year end or closer to now?

[Nick Anthony:]

Yes, I think it’s going to close in sort of two tranches, late third quarter and then later fourth quarter.

[Operator:]

At this point, we have no further questions here in queue.

[Ron Hubbard:]

I’d like to thank everyone for joining the call today. We look forward to reconvening with you on our third quarter call tentatively scheduled for October 26.

[Operator:]

Ladies and gentlemen, that does conclude the conference for this afternoon. We thank you very much for your participation and for using our Executive Teleconference service. You may now disconnect.