Duke Realty Corporation
Q4 2016 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty 2016 Fourth Quarter and Year End Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions] And as a reminder, today’s conference is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Ron Hubbard. Please go ahead.

[Ron Hubbard:]

Thank you, Tom. Good afternoon, everyone, and welcome to our fourth quarter and year end 2016 earnings call. Joining me today are Jim Connor, President and CEO; and Mark Denien, Chief Financial 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 the expectations. For more information about those risk factors, we would refer you to our December 31, 2015, 10-K that we have on file with the SEC. Now, for our prepared remarks, I’ll turn it over to Jim Connor.

[Jim Connor:]

Thank you, Ron, and good afternoon, everybody. Let me but start by saying that 2016 was another outstanding year for Duke Realty. We exceeded all of our beginning of the year goals and capped the year off with an excellent fourth quarter. Let me now quickly recap the outstanding year. We signed nearly 27.6 million square feet of leases which is impressive given our all time high occupancy levels. We improved in service occupancy to an all time record high of 97.5%, up from 96.4% at prior year end and grew same property NOI at 6%. We retained 78% of our tenants upon lease expiration; we attained nearly 17% rent growth on our second generation leases. We commenced $697 million in new development starts that were an aggregate 67% preleased. We completed $686 million in property dispositions culminating in our exit of the suburban office sector. We also sold 73 million of non-strategic land and monetized another $154 million of land through our development. In total, we recycled $759 million of proceeds to fund our development needs for the year and to further delever the balance sheet which resulted in a credit rating upgrade to BBB plus by all three of the major rating agencies during the year. Finally the strong operating results, asset recycling and capital markets execution contributed to growth in FFO per share of 5% and an increase to our regular quarterly common dividend of 5.6%. Now let me turn to leasing development activity from the fourth quarter. We had an exception quarter in leasing with 8.9 million square feet executed and we also commenced $242 million in new development starts that were 96% pre leased. Some notable leasing was as follows. We signed three leases in the Midwest with Amazon totaling 1.8 million square feet, two of which were new leases in previously vacant space and one new built-to-suit development that I will expand on in a moment. These three e-commerce leases are testament to our strategically located assets and track record of being a preferred facility provider for Amazon and other e-commerce companies. We also signed quite a few renewal leases. These transactions primarily ranged in the 200,000 to 600,000 square foot size with customers such as Samsung, Quaker, UPS, HP, HD Supply, [Tempur-Pedic] and Iron Mountain. In total, we executed 17 leases, each in excess of 250,000 square feet during the quarter. With this strong leasing, I’d like to note that at year end, all the three of our 21 industrial business units were 97% leased or higher on an in-service basis. With an overall in-service occupancy level in our industrial portfolio of 97.7%. Our medical office in-service occupancy ended up the year slightly at 95.3%. Turning to development for the fourth quarter we started $242 million of development in seven projects, that were an aggregate 96% pre leased. A few notable transactions were as follows. We started one speculative building in the quarter a 448,000 foot facility in Atlanta in our Camp Creek business park. Within weeks of breaking ground our team executed lease for 100% of the available space, a testament to the strength and demand in Atlanta and demand for our desirable business park near Hartsfield Airport. We executed two build-to-suit development projects with Amazon during the quarter. I touched on one of the deals earlier where we signed a 955,000 square foot lease for a new fulfillment center in Chicago in our Butterfield Corporate Park. The second build-to-suit with Amazon was a three building data center totaling 446,000 square feet in our TransDulles Centre in Washington DC. This transaction monetized the remaining land and the Park and also incorporated the re-development of a vacant office building. Let me know that our development costs are for the Shell and base tenant improvements only and it is not our intention to hold these assets for the long term. We started two other build-to-suit deals in the Midwest totaling 536,000 square feet. These deals were executed with Daimler Trucks and Best Buy both with lease terms in excess of 10 years. We also started the 37,000 square foot built-to-suit medical office building during the quarter in Southern California, which is a 100% free lease to provident health systems for a term of 11 years. Including the strong fourth quarter activity, our development pipeline at year end is 734 million and 69% pre leased in aggregate and it’s expected to generate a gap yield of 7%. I’ll now turn it over to Mark to discuss the financial results and capital plans.

[Mark Denien:]

Thanks, Jim. Good afternoon, everyone. I am pleased to report the core FFO for the quarter was $0.31 per share compared to $0.29 per share in the fourth quarter of 2015. This increase is the result of improved operational performance, development properties being placed in service and lower interest expense. We reported core FFO of $1.20 per share for the full year of 2016 compared to a $1.17 per share for 2015. The increase in 2015 was driven by the same positive factors affecting our fourth quarter performance offset somewhat by the dilutive impact of our Suburban office dispositions. AFFO totaled $378 million for the full year of 2016 and $90 million for the fourth quarter compared to $355 million and $84 million for the comparable periods of 2015. Our annual results represent a 5% increase over 2015 on a share adjusted basis. This represent a conservative annual AFFO payout ratio of 69%. With regard to capital activities during the quarter, we utilized cash on hand at the beginning of the quarter to complete the previously announced redemption of $130 million in unsecured notes that were scheduled to mature in 2019. We finished the quarter with only $48 million outstanding on our unsecured line of credit and we have no significant debt maturities until 2018. Our 2016 actions to reduce leverage resulted in both Moody and Standard & Poor’s upgrading our credit ratings during the fourth quarter to Baa1 and BBB plus respectively. These upgrades coincided with the completion of our deleveraging strategy and we are now in a great position to fund future growth. I’d also like to touch on a few aspects of our portfolio that should add some transparency to our 2017 FFO and AFFO modeling aside from the key guidance points Jim will present in a moment. First on dispositions. Our dispositions for 2017 consist mainly of the last few straggling office assets we own and will be heavily front end loaded including the disposition of a 548,000 square foot office park in Indianapolis that just closed this week. Also, most of the 2017 dispositions have a fair amount of near term tenant rollover so the cap rate on 2017 dispositions will likely be 50 to 75 basis points higher than our 2016 dispositions. Secondly, regarding CapEx, with our current in-service occupancy of record levels, only 6% of the leases expiring in 2017 and coupled with our exit from office our expectations on CapEx are of course lower going forward. Generally speaking these factors should drive overall CapEx down 5% to 10% year-over-year. Now I will turn the call back over to Jim.

[Jim Connor:]

Thanks Mark. Yesterday we announced our range for 2017 core FFO per share of $1.21 to $1.27 with a midpoint of $1.24. In addition, we announced a range for NAREIT-defined FFO per share of $1.19 to $1.32 with a midpoint per share of $1.25. We also announced growth in AFFO on a per share basis to range between 1.9% and 7.5%. First from a macro outlook perspective we expect the economic environment in 2017 to approve a bit over 2016. GDP forecast earned a 2% to 2.5% range. The secular growth trends in e-commerce sales are very strong with forecast of 15% for 2017. Similar to the last few years we believe moderate GDP growth and continued double digit growth in e-commerce will drive outsized demand for modern industrial logistics facilities. In 2016, demand outpaced supply by roughly 85 million square feet. Nationwide availabilities continue to fall and are in an all time low of 4.9%. These dynamics drove reported year-over-year rent growth to 7% in 2016 over the prior year the highest since 2007. Sitting here a year ago we expect it to reach supply demand equilibrium by about this time. However, demand exceeded our expectations particularly due to e-commerce tailwinds and supply has been more disciplined during this cycle as we’ve discussed previously. Our industrial outlook for 2017 continues to be favorable based on strong demand and adequate controls on supply. Vacancies heads down a bit towards 4.5% and rent growth in the 5% range after the record year of 2016. A few specifics on some of the anticipated key performance metrics outlined in our 2017 range of estimates page provided in the back of our supplemental package or on the website are as follows. Our average in-service portfolio occupancy range for industrial and MOB on a combined basis for 2017 is expected to be 96% to 97%. The range will be most impacted by the success of leasing, our speculative developments coming online during the year. Same property NOI growth for industrial and MOB on a combined basis is projected in the range of 2.5% to 4.3%. The best case for this growth assumes no occupancy growth and the context that we have record occupancy levels; however this assumes continued strong rental rate growth on rollover and embedded lease escalations. More importantly, and separate from our formal guidance for the year, keep in mind that including recent development projects that are not yet included in our same property population our total portfolio upside to NOI from Q4 2016 is probably in the high single digits on a percentage basis. On a capital recycling front we expect proceeds from building dispositions in the range of $150 million to $350 million with proceeds from land dispositions of $10 million to $40 million. While these dispositions will be dilutive to FFO we expect the drag to be less than prior years and more importantly we expect the corresponding capital recycling to contribute to AFFO growth. Acquisitions are projected in the range of $50 million to $150 million. We expect it to continue to be very selective given today’s pricing environment. Development starts are projected in the range of $450 million to $650 million , the midpoint of $550 million is down a little bit from 2016 due to our large pipeline of fourth quarter development starts heading into 2017, yet in general we are optimistic on development opportunities for the coming year. Service operations should be in the range of $2 million to $4 million which is below our 2016 run rate. We believe this is a positive development as we continue to focus on long term, on balance sheet development over third party work. Let me also share our perspective on the impact of this reduced run rate. If we would adjust down our 2016 FFO and AFFO to reflect service operations at our 2017 level of $3 million it would imply a growth rate of 5% to 7% for FFO and AFFO respectively. One last comment on our earnings and cash flow growth. While 2017 growth in FFO and AFFO will be solid, I’d like to point out that there will still be a fair amount of 2016 results tied to the remnant suburban office properties and higher service operations. Thus we could theoretically frame 2017 as the first clean year of FFO and AFFO for Duke Realty. More importantly, looking forward we believe our high quality assets and best-in-class operating team are in a very good competitive position to take advantage of attractive long-term industrial fundamentals. In turn, we are confident in continuing to drive cash flow growth and dividend growth for our shareholders over the long term. Before we open up the lines, I’d like to acknowledge the entire Duke Realty leadership team for its efforts in producing another great year of execution on our real estate operations and capital activities. Coupled with our very strong balance sheet, best-in-class asset quality and leading development platform, we are very optimistic about our ability to continue producing reliable AFFO and dividend growth, shareholders over the long term. I will now open up the lines for questions. We would ask you to limit yourselves to one question or perhaps two short questions. You are free as always to get back in the queue and ask a second question.

[Operator:]

[Operator Instructions] And our first question today comes from the line of [Brad Burke]. Please go ahead.

[Unidentified Analyst:]

Hey good afternoon guys. Jim, I was hoping you could expand on your industrial market supply and demand expectations. How do you think supply shapes up this year relative to last year? And I understand that you expect vacancy to continue to decline to edge down in 2017, but how are you thinking about the absolute level of demand this year versus last year?

[Jim Connor:]

Well to start with from a supply demand perspective; we think demand is probably going to be down a little bit. We’ve been at 255 million and 260 million square feet a year for the last couple of years. So I think we are anticipating that number is probably going to be a little bit more in the low 200, say 200 to 220, but in our research and tracking spec development everything else we don't see the supply side getting much above 180 million square feet. So I think we’ll still be positive, at least probably 20 million square feet and I think the opportunities that we are seeking in our development pipeline today would back that up.

[Unidentified Analyst:]

Okay. And on your same-store guidance, can you give a little more granularity how to think about industrial versus medical office, and then also how you are thinking about the specific inputs that go into that same-store forecast for industrial?

[Mark Denien:]

Yes, Brad this is Mark. I think from a same property perspective there are two different product types that are probably pretty close each other. We believe we've got still some occupancy upside on the MOB properties. Rental growth will probably won’t be near strong on the MOB properties as is going to be on the industrial, but it’s got more occupancy upside. Then when you look at the industrial, like Jim said, our base case the way we’ve modeled it out is that overall occupancy is going to be pretty flat and I would maybe even think that it could be slightly negative on the industrial portfolio, but that will be more than offset by this the tremendous amount of rent growth that we still think we can get. So different reasons why where are the gross coming from on those two different portfolios but I think at the end of the day they will be pretty similar.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

Our next question comes from the line of [Emmanuel Korchman]. Please go ahead.

[Unidentified Analyst:]

Hey guys, good afternoon. The portfolio they have recently purchased with the purchase option from the JV. Anything else like that in your overall portfolio that we should be mindful of?

[Jim Connor:]

There’s nothing eminent, Manny. I think our outlook is any time we think we can opportunistically buy a property particularly a newer property out of a joint venture that we like. We’re happy to talk about doing that. We had a situation at the very end of the year where we were able to buy a building that was 60% prelease that we like out of on a very quick basis at a good price, so we stepped up and brought our partners out, but I don't, there is nothing eminent that we are looking at right now. But as we like to say the window is always open for business.

[Unidentified Analyst:]

Great. And then Jim if we look at the supply and demand stuff that you went through, we appreciate those -- where do you think you could be more wrong? Do you think that you might be underestimating supply or overestimating demand?

[Jim Connor:]

I would tell you that the industrial sectors vulnerability from where we sit today, I think is more on the demand side. I think there are a few uncertainties out there in the geopolitical world that could negatively impact demand. I think supply is very much in check as it has been for the last three years, and my peers and I probably sound a bit like broken records. And I think for the last couple of years everybody has anticipated we reached some level of equilibrium and here we find ourselves again with a sizable outpacing on the demand side. And so I think you are going to see supply pretty consistent with what we’ve been talking about for the last two years and I think if there's any vulnerability out there, it's a result of something unanticipated on the geopolitical front

[Operator:]

Next question comes from the line of [Ki Bin Kim]. Please go ahead.

[Unidentified Analyst:]

Thanks, just following up on that previous question. Your forecast for demand supply is that equilibrium [Indiscernible] cooling demand, how does that impact your market rent growth forecast?

[Jim Connor:]

Kim, I think we just came off a year where most of the experts and we saw rent grow in what I would call the tier 1 high barrier markets that probably in the 10% range, and the balance of the market is probably in the 5%. The rent growth number I quoted was CBRs at 7%. I think everybody is anticipating that that probably slows a little bit, which is where the expectation of the 5% come from.

[Unidentified Analyst:]

Okay, but it is still assuming that demand outsourced supply, I guess I was just getting to a point where maybe where the market is concerned about demand equaling supply and what that bodes for rent growth. That's what I was asking about.

[Jim Connor:]

Okay, all right. Well, yes, obviously but as we’ve talked before even when the markets reach equilibrium and you’ve got supply and demand in balance which as everybody has contemplated for the last few years, I don't think we’ll quite get there, but even if we were to get there, we’re still optimistic we can continue to grow rents at 3% or 4% when the markets are in equilibrium. You’ve got all time record low vacancies and they should stay in that range even if you reach equilibrium.

[Unidentified Analyst:]

Okay and just one quick one, can you just help me frame the same sort of run rate for 2017? It looks like in the first quarter you will still get a somewhat decent occupancy comp benefit because the first quarter last year was a bit lower, so if you had to kind of draw that line what does that picture look like as we go throughout the year?

[Jim Connor:]

Yes Ki Bin I think it’s probably good. I mean I think it’s safe to say that if you take our fourth quarter same property numbers we posted which is in the mid fours and take the midpoint of the guidance which is in the low threes. I think that deceleration will occur evenly over the year to get down to that level, for the very fact that you just stated we are coming off harder and harder occupancy comps each quarter as we get into 2017.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of [Eric Frankel]. Please go ahead.

[Unidentified Analyst:]

Thank you. Related to the geopolitical environment I think comprehensive tax reform is on the table. Have you had any discussion with your largest customers and clients on how they would think about leasing versus owning larger distribution fulfillment centers if that comes into play?

[Jim Connor:]

Well, that as a result of the tax reform that's being contemplated. I think we had a lot of those conversations in late 2015 and early 2016 when there were lot of discussion around the changes in accounting rules. And you’ve got companies that very much believe in owning their real estate. You’ve got companies that believe in leasing their real estate. And I don't think either are going to change company's perspective on that. That’s long been a situation that we dealt with the hospital systems that we do business with in our healthcare business. And again you’ve got -- you just got a fundamental belief by some companies that owning your core assets is better and you got others that believe in leasing and expensing it. So I think you’ll continue to see that.

[Unidentified Analyst:]

Thank you. Thank you. One quick follow-up question related to land. Can you quantify how much of your development starts in 2016 and 2017 is on land you already own versus what you have to purchase and maybe you can just touch upon the land acquisition environment?

[Jim Connor:]

Well, boy, Eric I wish I was good enough to tell you where I was going to do every development for the remainder of 2017, so I could tell you how much of my land I’m going to go through. I think we had a great fourth quarter, little stronger than even we anticipated which is what got us towards the 700 billion. If you look at the non-strategic we sold and strip that out. We use about 155 million I think give or take of our land was monetized to development. And I think our expectation is about the same for 2017. In terms of the land acquisition market out there, our total land inventory wholly-owned and are share of joint ventures is were now down to about 290 million of land on our books. We have a number of non-strategic sales set to close of the first quarter. I think that number could bottom out in the $250 million neighborhood, but we also need to acquire some land in a number of key markets at Chicago, New Jersey, Eastern Pennsylvania, Lehigh Valley, Southern California, so, we’re going to be out looking to acquire some sites and work that inventory backup, but I think in the short term that will dip down and then we’ll work at back up as we begin to acquire some sites.

[Unidentified Analyst:]

Okay. Thank you for the color

[Operator:]

Next we’ll go to line of Jeremy Metz. Your line is open.

[Unidentified Analyst:]

Hey, guys. Just sticking on the same topic, I was thinking about the pace of developments here beyond your range and just really what’s going to govern that. So is it really going to be your ability to go out and find sites and opportunities or will it be based on some of your ability to sell more to fund them, where the stock price at? Can you give us some color there?

[Jim Connor:]

No. With 290 million of land we've got more than enough land to meet our development needs for 2017. We just made modest land acquisitions, we would be fine this year. Where you would start to see that, hurt us would be 2018 and beyond if weren’t able to start to replenish some of that land. So, I think we’ll be fine from that perspective.

[Mark Denien:]

And then Jeremy, as far as the total amount of volume that we would be willing to do, I mean, we’ve got 550 at the midpoint of guidance. We did 700 million of starts we call it in 2016. If we get the right opportunities at the right preleasing levels Jim said over and over we really want to keep our development pipeline above 50% preleased. If we can continue to do that, the opportunities are there. We do $750 million of development again.

[Jim Connor:]

Yes. I think that’s always a possibility as long as the industrial sector stays healthy. What really contributes to us having banner year like that is a number the larger billion plus square foot buildings and average industrial deal is probably in that $20 million to $30 million range, the billion dollar -- with a million square foot builder suites tend to be probably in that 60 or 75. So you pop a few of those in a year that you were anticipating and that’s really kind of what gets you from 550 million up towards 700 million.

[Unidentified Analyst:]

And just in terms of funding that if you did find those opportunities?

[Mark Denien:]

Well, we got capacity on our balance sheet right now Jeremy to fund it, I’ll call it line of credit and then term it out with long-term debt. Our leverage metrics are what I would call at the very top in the BBB plus range, we’re very happy with our upgrade, we want to stay there. But with the dispositions we have in the base budget, we can take on some additional debt and fund additional development above what we have in the guidance right now.

[Unidentified Analyst:]

And just one more if I could. I just want to ask Jim, your thoughts here on the MOB and whether its monetizing going there, going forward or it was strategic place that’s really having dope now that you’re essentially out of the office market? Thanks.

[Jim Connor:]

As the business is -- the business is still very good for us right now and we’re happy with it. We've got a number of questions in the fourth quarter and early in the year about have we changed our perspective relative to the incoming President's perspective on the Affordable Care Act. And we talked a lot with our clients about what we think the impact is going to be. They don’t think it’s going to have an impact, it’s not going to slowdown the development pipeline. So, right now, at full speed ahead we’re creating a lot of value just like the deal we signed in the fourth quarter, long term lease in great markets with really solid healthcare provider.

[Unidentified Analyst:]

Thanks.

[Operator:]

Thank we’ll go to line of Sumit Sharma. Please go ahead.

[Unidentified Analyst:]

Okay. Jim, question about, I guess what are you hearing from your tenants? Are you seeing any difference in the type of RFPs or space being demanded post-election as tenants sort revisit their plans? Or is it still a lot more of that heavy e-commerce DC focused. If you can give any kind of early indicators that you’re seeing?

[Jim Connor:]

Well, I would tell you that we’ve seen no change in strategic direction from for many of our clients. We did not loss any business either development or leasing where our client said, because of something the President said or didn't say or is being contemplated we’re putting a deal on hold that were changing our strategic direction. So, I think a lot of people have in general come down from what was probably a lot of strong political rhetoric during the election to what is now at least a little bit more civilized and productive conversation. There was obviously some concern about the Affordable Care Act. There’s obviously been a lot of discussion about foreign trade, but I think everybody today believes the President and his cabinet are going to go about that in a somewhat orderly fashion. I think Secretary [Indiscernible] has said that any sort of a trade war on tariffs are an absolute active last resort. So, I think that given most of our clients some comfort. As it relates to the e-commerce if you're an industry where you got growth of 15% a year, you are going full speed ahead. So I think you can expect those customers to continue on a very, very aggressive path.

[Unidentified Analyst:]

Thank you. I actually wanted to follow that up with a little bit of – I guess are you seeing anyone say that they wanted more manufacturing space or space that could be sort of manufacturing plus DC? And as a still separate follow-up, I guess what I'm wondering about your 2.5% to 4.25% SS NOI growth range. How much of that considers early renewals? And f it doesn't consider any renewals is that the source of potential upside over the higher end of the range?

[Jim Connor:]

Okay. Let’s deal with the first one first, manufacturing, I think it's still a little early given the lot of political talk and the potential impact on manufacturing. The second is we’re probably not the best people I asked. The vast majority of our tenants are warehouse distribution. We do some light processing, but our tenants and our clients in general are not big manufacturing guy. So, we haven't seen an uptick in interest or demand for manufacturer guides. But I would qualify that we’re not, probably not the best guys to ask. We've seen really good, strong continued response of the distribution side, but again I can't speak to the manufacturing. And then I’ll let Mark with the same store and any upside there.

[Mark Denien:]

Yes. I think there is the potential for some upside there, but for the yearly number I don't think it will be to material. Any leases that we would pull forward we generally do plus or minus three months in advance, so you could see some leases done, let’s just call it early Q4 that really aren’t in our numbers right now that could help a little bit, but you’d only get a quarters worth of an impact from that.

[Unidentified Analyst:]

Great. Thank you so much

[Operator:]

All right. Next we’ll go to the line of Kyle McGrady.

[Unidentified Analyst:]

Great. Hey, John Guinee here. Thank you. Couple of questions that I'm not going to ask, but I’m just curious as to, Mark you had a lot of reasons for what appears to be low FFO growth but you didn't mention or maybe you didn’t, I miss that that your debt balance went from $3.3 billion to $2.9 billion in the last 12 months where you raised and your share count increase but 8.2 million shares. And I'm just curious, I’m not going to ask this question as why you refused to give AFFO per share numbers and you all have all these goofy growth metrics. Is that your attorneys talking to you?

[Mark Denien:]

So that’s not a question, right John.

[Unidentified Analyst:]

Not a questions, but just my question is for Jim. I’m just curious as how does one spend $500 a square foot on an MO 37,000 square foot MOB building, what goes in that building. And then out of curiosity when you’re building a 1 million square feet for Amazon, is that a million square-foot footprint or does that include mezzanine space and what’s going into that a million square-foot with a Duke dollar commitments and then when you stop and when does Amazon star?

[Jim Connor:]

Got it. Okay. We’ll take the MOB first. I guess the first think I would tell you is across our entire portfolio RMOB average investment is about 350, some of the what I would call, older buildings are probably in the two to $250 range and some of the was between five and $700 a foot. The one that you're probably referencing is in Southern California and the land is the really big driver there. A lot of our clients when they go to off-campus want almost [quasi] retail locations for the visibility and to attract patients. So, land is probably the single biggest driver of that and as you know land in Southern California is fairly expensive. In terms of the Amazon million square footers or for example, the 955,000 foot that we’re building in Chicago, that is the footprint of the building. We don't count mezzanine space or any of that. And in terms of the investment that we make I like to tell people we own the bricks and mortar. I don't own any of the material handling equipment. I don't own any of the mezzanine. I don't own any of the robots, all of that stuff. So, at the end of the day and we've never lost the Amazon and one of our buildings, they’ve never moved out, but someday they will and when that happens Amazon can take all their stuff out and I own a great million-square-foot building with lots of parking, lot the truck storage 36 or 40 foot clear, lots of truck docks and I’ll go leasing to Kimberly-Clark or Procter & Gamble or Walmart.com whoever the case may be.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

Our next question comes from line of James Feldman.

[Unidentified Analyst:]

Great. Thanks. I guess speaking with the Amazon question, talking about some the leases that you signed this quarter or projects you delivered, can you maybe tell us what about the latest model that you are using. Like how are these building different then maybe some of the early leases you signed with them?

[Jim Connor:]

Well, what I can tell you is what you guys can access from their investor site and the research has been published about them. They are an ever evolving client and they have a lot of prototypes out there. But what I will tell you is they have two models for their fulfillment centers, [sort non-sort] those are the kind of the million-square-footers, and sort non-sort just determines the size and nature of the products that to go in it. So little things and widgets are in the sort and the lawnmowers and kayaks and things like that are the big ones. So that still very much a part of their delivery model, their logistics model. They’ve got now some what we would call midsize buildings anywhere between three and 600,000 feet, some of those are sortation centers that deal with outgoing product, some of those re-supply some of the fulfillment centers, so that they can keep product there and keep those moving at maximum capacity. And then they’ve got series of smaller locations which are combination of their last mild and same-day delivery, and those can range in size from small as 20,000 feet to about 50 or 60,000 square feet. And to my knowledge they continue to expand in all of those different size ranges on an ongoing basis.

[Unidentified Analyst:]

Okay. That’s helpful. And then I guess as we think about the guidance both in terms of revenue NOI number and the development starts, how much of that at this point would you say you have high visibility on meaning either contracts are signed or very far along in the process versus more speculative in nature?

[Mark Denien:]

Well, [Indiscernible] like that 25th of January, so I don’t have that much signed yet. No, most of – when we give an outlook and we feel pretty good about the development pipeline for the year that's just what it is, that’s the pipeline. Its projects that are in conceptual design, negotiation, pricing and things like that. And we’ll have what we think will be likely a good first quarter and then beyond that your crystal ball gets a little foggy in terms of where deals are the fall and how many of them are going to get signed. And then the wildcard for us is how much speculative element are we’re going to be comfortable with. And that’s the combination of continuing to monitor the strength of the local markets and how well my guys do anything to spec base that they currently have in the system and that they have coming online through the year. So, we will continue to do speculative development probably not as much of some of our peers because we want to keep that development pipeline above 50%, but where we currently are we got adequate room to do some more spec development across the system and I think you’ll continue to see us do that 2017.

[Unidentified Analyst:]

Okay. And I know it’s very too early to have answers on, what happens with trade here, but given what’s happening geopolitically do you have any internally any conversation about maybe testing new markets or getting ahead of maybe some potential shifts here?

[Jim Connor:]

No Jemmy, we’ve try to be pretty consist over the last few years. We do not have our eyes on any new markets if we did a major portfolio acquisition and we found some in a Charlotte or Denver or Memphis or Louisville, we wouldn’t say no to those, but we’re not targeting any of those. I think we’re much more focused on trying to grow our portfolios and some of the newer Tier 1 market. So, we’re very focused on trying to become a major player in Southern California, Lehigh Valley, New Jersey, we’ve got to continue to work on our growth in Northern California and Seattle were we got in a small modest investments and we want to continue to grow there.

[Unidentified Analyst:]

Okay. And then finally just, can you talk about the appetite for the assets for sale and any of those conversations – any of those in negotiation now or you're still out there looking for buyers?

[Jim Connor:]

Well, as Mark mentioned in his prepared remarks, we did close one of those office deals just this week, and we’ll report that in detail at the end of the first quarter. I think we've got a couple of items that are pretty well along, so I think you'll see a lot of that office product that we had speed up last year that for one reason or other didn’t get closed at the end of last year probably be more oriented towards the first quarter this year. And then, we’re through the office and we have just very modest dispositions through the rest of the portfolio with a little bit of recycling and I think we’ve talked about last year going into this year that in 2017 you'll see our dispositions pipeline get down to a much more normalized run rate from roughly $1 billion a year where we’ve been running for the last five or six years.

[Unidentified Analyst:]

Okay. That's great. Very helpful. Thank you.

[Operator:]

Next question is from the line of Richard Anderson. Please go ahead.

[Unidentified Analyst:]

Thanks and good afternoon. So the question from me is on e-commerce and the risk that industry or Amazon particular gets out over it skis to some degree, maybe that happened this year, but at some point it probably does. You refer to at some point they will move out of one of your buildings who knows when that'll happen but it is reality at some point. I'm curious to what degree you provide a second set of eyes for your tenants in terms of the aggressiveness by which they are building out their distribution business. Have you ever a tough conversation with somebody and said, this may not be a great idea given this, this and this in the landscape. Are you just kind of like assume that they know what they are doing and just look at the credit and hit the play button when the time comes?

[Jim Connor:]

Well, I’ll give you two answers. In the case of Amazon, since they are proverbial 900 pound gorilla, I kind of think they know what they're doing and they certainly have the balance sheet to back it up. I can’t tell you that we have a lot of those types of conversations with clients or prospective clients. Most of the people that we’re doing business given the size of the distribution centers that we are typically doing are fairly well run companies with sophisticated real estate and facilities departments, most of them have relationships with very strong national brokerage companies. So they are getting pretty good advice, they are also getting good legal and accounting advice. So, it's very rare that we find a situation where we don't – we’re not comfortable with the model. You get that more in some of these startups and some things like that. The other aspect of it you'll get as you’ll get tenants that will want some very specialized buildings, and in that case we say we’re just not the right guy for you. We want to invest in buildings that we’re comfortable owning for the long term, because as you said earlier what eventually tenants may move out and I want a really good building that I can release to the next guy and a specialized building doesn’t do that for me. So, I hope that answers your question, Rich.

[Unidentified Analyst:]

That’s good color. Thanks. And then second short follow-up, maybe to Mark, the guidance that was issued a year ago was be in terms of same-store performance and this time around it seems to me possibly that the geopolitical issues or Trump I guess use those words interchangeably, are maybe creating a motivation of conservatively -- could be conservative in the way you communicate things at this point in the cycle. Is that a fair way to say that you’re kind of thinking broad picture about the guidance today and that may be development starts will go up and maybe you get a little bit more out of your same-store and tough maybe with the occupancy where it is, but I’m just curious to what degree you're kind of view the world today is influencing how you are communicating guidance versus the way you did it this time last year?

[Jim Connor:]

Rich, that was a really long eloquent way of calling Mark a sandbagger.

[Mark Denien:]

Now Rich, I think we certainly don't like to disappoint to anyone, so we want to give guidance that we’re comfortable with. We would certainly like to be obedient, but we try not to sandbag either we try to find a fine balance. I would tell you that the differences I say here today from last year is we did think we had some occupancy upside last year. We got a lot more than we thought we had. As I say here today at 97.7%, I just quite honestly don’t see it. I don't see the occupancy upside in total on the same property line. Now at the other side of that though is I do think we have just as much upside today or even more than we did a year ago on our non-same property pool of properties because we did a lot more development over the last I’ll call it 18 months and lot of it was built-to-suite, some of it was spec and there was upside in those projects and they’re just not call the same property. So I think our overall thought process on growth in NOY I call it is we’re pretty bullish on that right now. It just may not be all called same property. Now, we still want to beat our numbers but I think at this point in the cycle I think it’s prudent based on the guidance we gave.

[Unidentified Analyst:]

If I get 105% occupancy in my model, I guess I should take that down a little bit, right, is that what you’re saying?

[Jim Connor:]

We don’t think there’s any way we can do more than a 103, Rich.

[Unidentified Analyst:]

Okay. Got you. Thanks very much.

[Operator:]

Our next question today comes from the line of Neil Malkin. Please go ahead.

[Unidentified Analyst:]

Hey, guys. Thanks for taking the call. I have two quick questions and four long follow-ups. So, first one is you said that this year is not going to be quite equilibrium yet from a demand supply perspective, 5% market rent growth, record occupancy, are you planning on being very aggressive with renewals or just rental pushing rate in general, given the clear demand there is and willing to see maybe retention go down to get maximize the capture of very strong market?

[Jim Connor:]

That’s a very good point and we’ve talked about that from time to time, now really over the last, probably six or eight months as our occupancies continue to push north, the logical question is are we renewing too many of our tenants. And I think when you look at our rent growth numbers year-over-year I think I can say with a strong degree of confidence our people are out there pushing and pushing pretty hard. I think it's a combination of people don't have a lot of alternatives in the marketplace. When you got an average about 4.9% vacancy, people don't have a lot of options in the market and there are the opportunities to leverage different landlords and a lot of the opportunities that do exist are new construction which are generally at the top of the price point. So I think the combination to those things has led us to have both a very high renewal rate which we’re happy with, but some really good rent growth numbers and I think you'll continue to see us push. One of the other things I would add is we have consistently been telling our operating teams, if we've got marginal tenant somebody that you're concerned about from a credit perspective, somebody that’s been a troubled occupier consistently late or things like that, now it’s a time to get rid of them, push him out and let's go lease up this space to somebody else. So, we’ve had an opportunity to do a little bit of housecleaning in our own portfolio to move some tenants out that we're not particularly happy with and backfilled them with good stronger tenants. So that’s another one of the directives we’ve given the operating guys.

[Unidentified Analyst:]

Okay. Thanks. And then last from me. Are you seeing, I think everyone knows about e-commerce but any other sectors may be having a Renaissance as far as demand or any type of growth, maybe are you seeing anything out of the homebuilding or household sectors. Perhaps like automotive or related parts, maybe anything coming back a little bit with even energy and anything you could comment on?

[Jim Connor:]

Yes you hit to the better ones. With the housing market continuing to get healthier, we've seen particularly in our midsize portfolio obviously good leasing, good occupancy, good rent growth, but more tenants. Typically get anything from the HVAC equipment companies, the stone and tile companies, things like that, that feed on the strength of the housing business, those guys are doing very well and that's given us good rent growth and good occupancy and what we kind of call our midsized portfolio. Automotive will continue to be a highlight for 2017. I think the analyst expectations are for another 17 million, 18 million units in the U.S. So any of the aftermarket guys and in your parts supplier guys will, should continue to do well. I think it will be interesting to see what the affect long-term and by that I mean the next 24 to 36 months for some of these companies and the auto companies got a lot of press in the last couple of days about some of the potential investment that they are going to make in some of the existing U.S. plants and some new plants. And I think that could bode well for our whole sector as you start to see more suppliers follow those. So those are probably the two. The other one that I would point out that kind of always looks under the radar is food and beverage. We’ve continued to see our food related clients, beverage related clients continue to grow and demand more space. We are also starting to see Amazon Fresh and Amazon Pantry get rolled out into more markets around the U.S. and they are taking up considerable warehouse space. So that bodes well for us as well.

[Unidentified Analyst:]

Thank you.

[Operator:]

And our next question comes from the line of Michael Mueller. Please go ahead.

[Unidentified Analyst:]

Thanks. Looking at your 2016 versus 2015 leasing activity on page 22, and it looks like for both the Bulk and MLB portfolios. The new leases signed had a duration that was about a year longer than in the prior-year and on the renewal side they had shorter durations by a year or more. I was just wondering is that the trend you are seeing or just how the numbers shaped out in 2016.

[Jim Connor:]

Well I would tell you that just how the numbers shook out. What we’ve been consciously pushing for the last several years with the record high occupancies that we’ve got. It’s a combination of three or four factors. Obviously we are pushing for higher rents; we are pushing for longer terms. We are generally not doing shorter lease terms. So we will occasionally have a client that will come to us and say we’re just not quite sure what we want to do with our business. We like to renew for just a year. And in today's world 12 month extension really doesn't work for us. So we had a few tougher conversations with some clients. We might compromise on a three-year renewal, but given the leverage that we have in the market today, pushing down on concessions, pushing up on rent trying to push lease terms.

[Unidentified Analyst:]

Okay. And I guess one other question on development starts. What the rough split between the Bulk starts and the MOB starts for 2017?

[Jim Connor:]

Well I would tell you that it was originally designed to be about 450 million of industrial and about 100 million of MOB. And as we were finalizing the budget last year right after the election, we thought there might be a little bit of uncertainty given changes in the Affordable Care Act. So it's probably between 450 and 500 million on the industrial side and between 50 and 100 million on the MOB side.

[Unidentified Analyst:]

Got it. Okay, great thank you.

[Operator:]

[Operator Instructions] And we’ll go to [David Rogers].

[Unidentified Analyst:]

Hey good morning this is Dick here at [Indiscernible]. The service operations income in 2016 was $8 million and for 2017 you guys are calling for $2 million to$4 million. I would've thought there had been a stronger relationship of the development starts. Is there a piece of the puzzle there that I am missing?

[Jim Connor:]

Actually there are fair, 2016 we had some fairly large third party construction contracts that were started in 2014 and 2015. They got closed out in 2016and we had some nice margin adjustments or gains at the end of that contract if you will. So that inflated the 60 number slightly. But it's really related to the development in that as we develop on balance sheet. We’re taking those resources away from those third-party jobs and building for ourselves. So all these development starts that we have in 2016, 700 million that will be volume during 2017, that all our people are working on. So we are working, basically we are capitalizing the overhead on the balance sheet redevelopment projects. We’ve been recognizing it through the income statement and services.

[Unidentified Analyst:]

Okay got it and last one is an easy one. Do you guys know what quarter the $285 million maturity is in 2018?

[Jim Connor:]

Yes, it’s in the first quarter.

[Unidentified Analyst:]

First quarter. Got it, thanks guys.

[Jim Connor:]

Yes.

[Operator:]

And gentlemen, there are no other participants queuing up at this time.

[Jim Connor:]

I’d like to thank everyone for joining the call today. We look forward to seeing many of you during the year at industry conferences as well as getting out to see our regional markets. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using AT&T executive teleconference service. You may now disconnect.