Q2 2020 Duke Realty Corp Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Duke Realty earnings results Conference call.

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Militarily conference over to our hosts Vice President Investor Relations Mr. Ron Hubbard. Please go ahead.

Thank you John.

Afternoon, everyone and welcome to our second quarter earnings call. Joining me today, our Jim Connor Chairman and CEO Mark to name Chief Financial Officer, Nick Anthony Chief Investment Officer, Steve Snyder, Chief operating officer.

<unk> prepared remarks today, let me remind you that certain statements made during this conference call any 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 in future results.

More information about those risk factors when you're free to our 10-K form 10-Q than we have on file with the FCC and the company's other resi filings.

All forward looking statements speak only as of today July 32020, and we assume no obligation to update or revise any forward looking statements reconciliation to GAAP and non-GAAP financial measures that we provided in this call is included on our earnings release Orange relation supplemental package were distributed last night after market close.

You did not receive a copy these documents are available on the Investor Relations section of our web site at Duke Realty Dot Com.

Also find your earnings release supplemental package as you see reports and audio webcast of this call and the Investor section of our website as well.

Now for our prepared statement I'll turn it over to Jim Connor.

Rob Good afternoon, everyone.

First of all we hope all of you and your families are safe and healthy during this pandemic.

Well, we last gathered for the quarterly earnings call in April World was grappling with the offset on the pandemic.

At that time, I outlined about a half a dozen risk management strategies, we had implemented tied to safety, but working capital preservation and more closely engaging with our customers.

Well, there's still a lot of uncertainties around the pandemic at its ultimate impact on the economy.

We are in a considerably better place from a capital markets liquidity and consumer confidence perspective, compared to three months ago.

Even more encouraging has been the resiliency of the industrial sector overall more specifically the performance of our portfolio.

Second quarter highlights, we achieved 27% growth in rental rates on second generation leases on a GAAP basis at 11% on a cash basis.

We renewed 75% of our expiring leases and including immediate Backfills, we released 96% of expiring leases.

So I am 7.6 million square feet leases, which contributed to 100 basis points increase in our total portfolio occupancy to 95.3%.

It was broad based across all industries with about 20% tied to E commerce.

Monthly rent collections remain strong at 99.9%, including executed short term rent deferral agreements.

The balance sheet side, we further bolstered our liquidity and lowered our cost of capital.

Executing a $350 million unsecured note issuance that achieved an all time record low 10 year coupon in the reach sector of 1.75%.

In addition, we tap the equity market generating $71 million of proceeds through our ATM program.

We published our fifth annual corporate responsibility report in May we highlighted our achievements and new initiatives and environmental social and governance, such as maintaining our long term long term track record of top tier corporate governance.

Turning to drive it improved the diverse unit health of our workplace and be respectful of and positively impacting the empire.

Now, let me turn it over to Steve to cover the operation side in more detail.

Thanks, Joe I'll first cover overall market fundamentals and then review our quarterly operational results.

Quarter ended up relatively strong in the demand front, given the mostly soften soft economic data points in the broader economy.

And with an estimated 20 million square foot range deliveries were up is expected to about 56 million square feet, which which pushed vacancies up 20 basis points to about 4.7%.

The full year the major research firms project about 250 million square feet, a deliveries with about a 120 to 150 million square feet in demand.

Given this outlook, we expect the year end roughly at about 5% vacancy.

The national basis, as we look into the future bit a key factor we've learned over the last four months.

The impact to consumer behavior, and supply chains that materially elevated demand for logistics real estate.

As an example, CBR. He is now estimated we can see 330 million square feet a demand in 2022 would you correct would be an all time record in demand.

Over the next five years CVR. He is also projecting about 1 million square feet of demand in total.

What happens with supply going forward is a little little bit harder to predict at this time.

While we do have some color on deliveries for this year, it's difficult to project the magnitude of Nustars. So I think we'll have to watch this closely over the next quarter. So.

With all the strong data points in E commerce supply chain resiliency and increased inventory levels. It's probable that do spec development start to ramp up some.

He said, we need another quarter or do you have to comment on that trend over the next year.

Turning to our own portfolio and as Jim noted, we had an excellent quarter from a leasing standpoint.

For the total leasing volume was 7.6 million square feet, we executed 1.9 million square feet, a renewal leases and either renewed or immediately release, 96% second quarter lease expirations rental rate growth and second Gen leases signed in the quarter was 27% on a net effective basis and 11% on a cash.

Basis, we believe the rent growth for the second half of the year will remain strong and we'll see similar performance levels to our recent history.

So the more notable transactions included 800000 square foot lease in a spec development in southern California scheduled to deliver towards the end of this quarter.

We also signed a 300000 square foot new lease encompassing two facilities in Raleigh on the renewal side, we executed transactions with a major home improvement retailers in Northern California, The American Standard Corporation, and South Dallas wafer New Jersey in a reverse logistics company in Nashville.

Across all leases the average size was 130000 square feet and our average lease term was about six years, which is fairly representative for performance.

We believe the size in terms of our transactions represents an element of differentiation in terms of lower portfolio volatility and typically more creditworthy tenants I'd also add that we're definitely seeing stronger demand from larger spaces across all of our markets.

In addition, we only have 3% of our leases expiring in 2020.

And 9% 2021, these low expirations, coupled with 15, 18% mark to market estimate our entire portfolio.

Should continue to contribute to lower volatility in strong stable hydro overtime.

We've added new exhibits in the supplemental report posted last night on our rent collections deferrals and bad debt expense.

We hope this provides helpful information as you know it can be difficult compare results between companies overall, we're very pleased with our REIT collection results and tenant credit where credit worthiness. We now believe our total bad debt exposure, we much less than we had feared last quarter.

This morning, 99.9% of our original we do second quarter rents and 99.9% of our originally June July rents have either been collected or deferred pursuant to agreements in place. The terms of many of the short term partial deferment agreements, we've executed required tenants to begin paying deferred.

Rents in July and we're happy to report, we've collected 100%, though those a mouse.

Turning to development, we had no new starts during the quarter. However, we have a very optimistic outlook on increased development starts for the remainder of the year.

For a number of improved demand indicators, particularly a few months a very strong data points in online retail sales business community reaction to recent supply chain bottlenecks as well as diversified supply chains and increased inventory stocking that will require new facilities.

Specific to our own situation, we stop space and our speculative developments faster than we had forecasted and Weve improved overall occupancy in addition to our strong rent collections I just covered.

We also have an inventory of strategic infill land.

Best Submarkets in tier one logistics cities, such as Southern California, South, Florida, Northern California in Seattle will be highly attractive to capture incremental demand going forward.

We continue to focus on build to suit development opportunities I'm happy to report we have a very healthy build to suit prospect list and supported by the economy and local our local market fundamentals. We may also look to resume speculative development in certain Submarkets Atlanta just mentioned.

Element pipeline at quarter end totaled $846 million with 82% of these dollars allocated to coastal tier one markets. These developments and projected value creation and the mid 30% range as pipeline to 65% Preleased, which is very impressive given the we delivered nine projects during the quarter totaling three per.

During 2 million square feet at 82% leased at the end of this quarter.

I'll turn it over the next to discuss the acquisition disposition environment.

I see for the quarter, we had no acquisitions or dispositions, which is not unexpected given the environment. We ran between March and June of this year.

Looking forward on dispositions most of the originally identified assets are now back in the process be marketed given the extremely high interest and industrial real estate and weekend.

Pricing to be at pre kogan levels or better.

As you're aware dispositions are a key component of our strategy to increase our exposure to coastal tier one markets diversify our tenant base.

Also an integral part of our funding strategy.

With regard to the tenant exposure topic, we recognize that are in our exposure is running slightly higher than historical levels.

Given our temporary pod recap transaction the second quarter, our disposition timing is a little behind schedule as we've done in the past we on the process of monetizing some hands on assets later in the year or early 2020 line, which will bring our exposure back down to more historical levels.

Not continues to be a great partner when a fabulous growth profile given all that's going on in the world having signed the elevating started or on a temporary basis to double a rating company growing at over 20% here and 1.5 trillion dollar market cap isn't necessarily a bad thing.

On the acquisition front the market remains competitive, but we continue to look for and find strategic opportunities.

The balance sheet to react quickly to that.

At quarter end, we've closed on one transaction have another three under agreement.

Now turn turnover our call over to Mark discounts, our financial results and guidance update. Thanks, Nick Good afternoon, everyone core AFFO for the quarter was 38 cents per diluted share compared to 33 cents per diluted share in the first curb first quarter of 2020, and 36 cents per share in the second quarter of 2019.

The increase the core FFO in the second quarter of 2020 compared to the first quarter was partly driven by three cents per share.

Decrease in general and administrative expenses due to accelerated noncash expense on our first quarter annual stock compensation grants are positive second quarter results were also the result of higher occupancy rental rate growth and lower bad debt expense bad debt expense during the second quarter of 2020 was only 463.

Thousand dollars compared to $5.5 million in first quarter, almost all of which was on a straight line basis, we reported FFO as defined by Knavery of 33 cents per diluted share for the second quarter 2020, compared to 20 cents per diluted share in the first quarter of 2020.

So FFO totaled $135 million for the quarter compared to $126 million from the first quarter this year and $122 million. The second quarter 2019, we continue to produce impressive AFFO growth, especially given the current operating environment.

Same property NOI growth on a cash basis from the three at six months ended June Thirtyth, 2020 was 5.0% and 5.8% respectively.

Same property NOI growth for the quarter was mainly driven by increased occupancy and rent growth.

Same property NOI from the suite and six months on a GAAP basis was 2.8% and 2.2% respectively.

Same property NOI on a GAAP basis for the six month period was negatively impacted by the straight line rent Collectability reserves, we recognized during the first quarter 2020.

From a capital standpoint, we issued $350 million 10 year unsecured notes at a coupon rate of 1.75% and an all in yield of 1.85%, which was the lowest ever by a renewed for 10 year unsecured note issuance I was among the lowest all time tenure rates among all corporate issuers, we used a portion of the proceeds of these notes to it.

Distinguished $216 million of EUR, 3.75% unsecured notes, which had a scheduled maturity in October 2022 through tender offer.

We also use available cash to pay down to $200 million a line of credit borrowing so were outstanding at the end of the first quarter.

I would now like to address the changes to our 2020 guidance that we have made which are based on our better than expected second quarter operations and considerably improved outlook for demand and tenant credit ones first we've increased our guidance for core FFO to a range of $1.48 to $1.54 per diluted share from a previous range $1.40.

I want to $1.51 per diluted share, which equates to a five cents per share increase to the midpoint.

The increase guidance for core FFO is driven by a midpoint decrease of about $8 million or two cents per share compared to the $16 million are bad debt expense. We estimated when we update our guidance in April again, I'll point out page 16 of our supplemental information, which details our bad debt expense estimates for the year.

And note that are approximately 100 basis points total bad debt expense estimates only about 45 basis points and this is on a cash basis.

For similar reasons to core FFO. We've also increased our guidance for May read FFO to arrange $1.35 to $1.43 per diluted share from a previous range $1.32 per share to $1.44 per share. This increase was less than or increased a core FFO to the loss on debt extinguishment, we took.

And second quarter in connection with the tender offer for October 2022 notes. We have also increased our guidance from the change in adjusted funds from operations on a share adjusted basis to range between an increase of 3.1% to 7.7% from the previous range of zero percent 6.2%.

Our same property NOI growth on a cash basis, we've increased our guidance to a range of 3.5% to 4.5% from a previous range of 1.75% to 3.25%. This increasing guidance premise largely on a revised lower expectations for cash bad debt expense increases and auctions.

We also increased our guidance for all of our occupancy metrics as outlined in our supplemental information on our website. The increased occupancy guidance as result, better tenant demand for our properties and the expectation of fewer tenant defaults compared to our previous guidance on development, Steve presented an update in fundamentals that supports a more positively.

Since game and second half the year for new starts our revised guidance for 2020 development starts is between $350 million 550 million compared to previous range of between 275 million to 429 million.

We have updated a couple other components for guidance based on our more optimistic outlook as detailed in the range of estimate cseven, including our supplemental information on our website I'll now turn it back to jump for closing remarks.

Thanks Mark.

Last quarter's results were very strong highlighted by solid leasing that led to a 1% increase in total portfolio occupancy.

20%, 27% rent growth and the strengthening of our already solid balance sheet.

EBIT amidst a global pandemic negative negatively impacting many sectors of the economy. Our state of the our portfolio has thus far proven to be extremely resilient and performed better than we had initially expect expected last quarter, coupled with our strong balance sheet and strategic land inventory, we are in a position to gradually ramp up.

Our growth and value creation by a development.

With this we're pleased to raise guidance on a number of our earnings and operational metrics.

Although we have ways to go to see through to the other side of the pandemic. What is now clear is that that logistics real estate businesses, and then separately strong position, we're optimistic and excited.

To leverage our operations development platforms to continue to grow our cash flow and dividend growth over the long term.

And last me, let me thank the extraordinary efforts by our team to continue to execute our plan from primarily remote locations and thanks to our customers in the brokerage community for collaborating remotely with us for the last three months and for the foreseeable future.

With that we'll now open up aligns to our audience for questions I would ask that participants keep the dialogue to one question or perhaps two short questions and of course, you are always welcome to begin to get back into queue. Operator, we'll now take questions.

Ladies and gentlemen to queue up for questions, Chris One zero on your phones keypad, you'll hear an acknowledgment that you've been ahead into Q and you can we move.

Repeating the one zero command. Our first question comes from Blaine Heck with Wells Fargo, one moment Blaine.

Go ahead your line is open Sir.

Great. Thanks, good afternoon. So.

So clearly 2020 development starts have trended down from where you've been in the past few years that looking forward and taking into account everything Steve went over in his remarks, you know the pullback we've seen across the board and supply.

And demands that seems to have held up well.

You know how should we think about the potential for you got to ramp up 2021 starts to a level that you know maybe even comparable to pre cobot.

Well I guess I would give a general comment.

Without.

Thank you.

You know real indication of guidance, but clearly we're a lot more optimistic about the second half of the year I think we can extrapolate from.

Our increase in guidance for the second half of the year would put us back into a more normalized level in 2021 of things for the whole.

Clearly, we need to maintain leasing on the development pipeline at our existing portfolio. We've got a great build to suit pipeline as Steve alluded to but.

Things continue to stay solid and that affords us an opportunity to do some spec development than I think you could see us.

Pushed back into kind of a more normalized level.

All right Thats helpful.

Hi, Good for me you got signed some pretty significant early renewals. This quarter can you just comment on how those types of discussions are happening or are you guys approaching the tenant or are they approaching you.

Are there any concessions being offered in exchange for that kind of quote unquote extension and then lastly.

How long before lease expiration or you guys had discussion.

A replay of this is Steve I'll jump in Weve very good lease volume I think for the quarter overall, if if your question was on the short term extensions.

I would say it was a little there's a little unique blip there with what was going on in April and May.

Were some tenants want to hold over short term or or takes take advantage as market conditions that we took advantage of the to plug a couple holes I think you'll see that number moderate back down to six or 700000 feet short term deals per quarter going forward.

I have to overall general discussions on extensions of renewals I wouldn't say anything out of the ordinary right now.

We had we had one unique situation in northern California.

There, where it was we acquired a piece of land and and the tenant is going to lease that on a long term basis. So we we extended the existing lease.

With with two to coincide with that so thats tied up long term.

We had another situation in northern California on an on another deal that was.

That was a little bit early then had to do with government contract on a short term basis. So.

And believe we broke those out separately in the supplemental I think for the first time this year.

We've done blend extends and things like that in the past. These were really not Steve we're not blend extent deals like Steve said it was really just a couple of unique circumstances and because the original lease terms were not changed and a new terms don't kick in for two or three years down. The road. We just didnt want to mislead everybody and think we're going to get substantial growth right away on those deals.

So they were just a couple of unique situations.

Got it that's helpful. Thanks, guys.

Next we'll go to the line of frankly with BMO go ahead.

Hi, good afternoon.

Core assumptions that were raising your guidance were due to strong leasing and lower bad debt.

How did you rent growth factor into that what do you coming from market rent growth and does this change from your previous guidance.

I think I and my comments I indicated growth was solid at 27% gap and 11% cash that's fairly consistent with where we are where we have been I think last year, we were 28 to 12.

I think you'll see us in that same sort of range for the for the balance of this year been rent growth. This is Phil landlords market, we're at 4.7% vacancy on a national basis.

We're still happy with the conditions out there in terms of supply and demand.

Frank I would just add to that for the current year like operating guidance on metrics like AFFO and items like that Everything's, Steve just mentioned is going to be great for 2021 and beyond it really does not impactful for current year numbers.

More for the future.

Thanks, and then you noted.

Potentially starting to effective on Internet few markets are there any market, particularly attractive.

First spec developments and maybe how dependent are your spec starts on getting companies in Canada for spec projects that are delivering next year.

As Jim indicated, we're we're always mindful of where we stand with our with our spec space. That's available we've done a really nice job that pipeline for us is down as low as it's been in a couple of years. So our teams have done a really nice job leasing up available spec space the markets.

Well look to.

We're focused on infill higher tier one markets. So I think you'll see us will be active in southern California, Northern California, Seattle, South Florida.

Maybe new Jersey.

Those would be the markets would be look into if we decide we want to pull the trigger on a spot gold.

Okay, great. Thank you.

Next we go to Nick you lover with Scotiabank go ahead.

Hi, This is summit in for Nick Yulico.

So just a question on the bad debt.

Yes, I think.

I appreciate that your bad debt expenses is trending down any thoughts that's almost minimized just wanted to get sense of how much the uncollected grant, which is default or deferred could impact your cash NOI growth of 5.0% this quarter.

And in addition.

I could also understanding that some bad debt like that.

I think that could you cannot Vic Dennis because of local.

Moratoriums.

Yes, So let me let me try to take desolate.

First of all when it comes a bad debt de Minimis to US is zero, we strive for zero, we're not quite there yet, but it is coming down that's for sure.

Very little are really none of that that we got into our pipeline right now is due to moratoriums or anything like that.

We're at 99.9% from the second quarter in July on collected plus executed deferment agreements. We firmly believe we're going to collect on those executed deferment agreements I think it's important to understand and on those agreements. These are not just free rent was what I call Hope certificate on the in these tenants are paying us curve.

Current on operating expenses and half their base rents, we did put up reserve for about 400.

$80000, we disclosed on current tennis or current on those deferment agreements on the only bad that we had the quarter for what I call delinquent work really problem tenants currently was $200000, which we also disclose on page 16.

That's about the 0.1% that we have not collected for the last four five months Thats would that 215000 relates to and we are in various stages of position on those tenants, but we don't think it'll be a long term issue because it's not under moratoriums or anything like that so we'll get those tenants out in the space and we're going to release.

Okay and.

Just following up on on impacted cash.

Why is it nothing or.

Oh, it doesn't move from 5.0 down slightly.

Well on on we've got the we've got the 463000 of cash that we booked this quarter in July and in our guidance for the remainder year, we have $3 million more.

Cash bad debt expense, that's bringing that in a wide number down that is already included in our guidance now hopefully will not need that $3 million, but thats, our best estimate right now.

Okay. Thanks, so much.

Our next question comes from Bruce Frankel with Green Street Advisors go ahead.

Eric Frankel here. Thank you.

Just a couple of question Steve.

Could you provide a little more color like chain bottleneck, Sarah Thanks Man.

Can you take demand boots, I think even the near term.

Yes, Eric.

I think there were a couple of examples there hit.

I mean that obviously, the one everybody's familiar with his toilet paper.

I think the you heard a lot of other examples people ran out of soup.

We've got clients that are looking at different facilities right now to to the new term are the Caribbean used today is sort of the safety stock and where does that end up.

People were running facilities. It just in time inventory levels and I think we're starting to see requirements pop up in different markets.

To to how's longer term goods too.

Ramp against.

Any potential disruption in supply chains again.

For mobile will still trying to track.

And then on the good just going back to the deferrals.

Could you maybe clarify what pipe.

And what type of industries are are requesting the types of agreements.

Yes, I guess, the we covered some of this in the first quarter, if I'm happy to say that it hasn't changed much most of what we say 95% of what we dealt with we dealt with and April and in early May.

The largest takeaway that I can give you from our portfolio is size related.

The vast majority of our deferral requests that we were ultimately willing to agree with and live with were under 100000 square feet.

And I guess, another comment I would make on it.

So the way we chose the handled the permits.

And what we put in our supplemental was.

We gave short term as Mark cover we give short term deferrals of partial parcel abatements. So most of the time tenants were paying at least 50% of their base rent costs plus operating expenses.

For a short period of time on average three months and that money was paid back to us within within five to six months. We did not do any blended expense I think if you look at our transaction volume is consistent with what we've done in the past and so we did not take any tenants and extend our on the back in and just call. It a new deal.

So yes, my biggest takeaway that not industry related theres, some obvious industries in there for travel and things like that but but it's more size related.

Okay. Thank you I'll jump back in Q.

And as we go to Jamie Feldman with Bank of America go ahead.

Great. Thank you I was hoping to get some color on movement in cap rates and just what pricing looks like I know there hasn't been a ton of deals so far but just what you think you can avenue with cap rates, especially as you put these amazon assets in the market.

Yes, Jamie this is Nick I would tell you that early on they were our view.

Asquith credit in term that traded at slight discount.

Those discounts.

Basically went away and given the industry environment, we do expect.

Those cap rates in potentially compressing further there's a tremendous amount of demand for those type of assets.

On core inside just Amazon at Fedex on vivo other ones like that so.

Yes, we think prices pretty good there are few transactions that we.

Put under contract and slight discount, but even think those those type of deals all will slowly dissipate as well.

Okay. Thank you and then as we keep hearing about the big names like you just mentioned.

Amazon Fedex.

Driving a lot of the leasing but you also said it's kind of broad base can you give some examples of like some of the smaller companies maybe we haven't heard about our industries. We haven't been thinking about that are also looking for space and maybe.

Maybe doing it for the first time or or kind of changing their supply chains for the first time.

Sure Jamie this is Steve.

I think when you look at I mean, our average deal size in the second quarter was 138000 square feet.

That.

I think thats, telling that's that's a little less than our average tenant size.

We did transactions with.

And food and beverage consumer goods.

A cellphone nicely so the cell phone company.

Reverse logistics. So I think it's been it's been again I think thats been broad based I wouldn't I would tell you.

Good morning, the activity not surprisingly is ecommerce related.

But that doesn't mean that thats, one tenant thats not just Amazon might say Amazon is probably 20% to 25% of the market activity today, but.

Theres Theres a whole lot other users out there that are that are benefiting from from the online channel as well.

Okay. Thank you.

And our next question comes from Manny Korchman with Citi go ahead.

Hey, everyone.

Tim or maybe Steve just if we think about your comments on the safety stock warehouses is there an opportunity or a risk.

And that those go to the tertiary locations and they just become theaters to the.

Better located demographic close to demographic warehouses that you guys focus on.

You May ask Jim I'll start then Steve can chime in.

I would tell you it's early on in the discussions at analysis.

You know if you're sitting in the real estate and facilities group that.

Procter and gamble or Kimberly Clark Clorox or Walmart any of these.

Major warehouse distribution users in the United States.

People are saying look we need to have more inventory.

In the U.S., it's accessible to our stores, it's not just necessarily covert related this has been building for a while remember issues that we had with China going back last year.

Tariffs and the trade wars and everything else.

You know major you as competitors, we could not we cannot put ourselves at risk. So I do a lot of the facilities people are trying to figure this out right now.

So do we we expanded existing warehouse do we go into a completely new market.

And it's all you know, it's all a function of how their logistics and supply chain operates and how much expansion. They want to put on it. So I can't tell you that weve necessarily see maybe Steve or somebody his guys have.

Specific leases that were identified is that I, just know theres a lot of those conversations going on right now come just trying to figure out how they're going to add to it Steve.

Manny all I would add as is.

There is there some talk of different locations outside of major markets for slower moving goods and with some are customers.

It's not product or or supply that will be involved in this area.

Thanks, and maybe one for for Nick as we think about cap rates, comprising and the amount of capital that continues to target the space.

Is there an opportunity to get out of sort of tougher assets or tougher geographies for what you have left acknowledging the sold out of a lot of that suffer ready.

We marine we've already sold.

We really got any.

We really don't have a lot of assets to really call from the portfolio going forward I mean, we'll continue to.

The prudent and try to keep improving our portfolio, there's not a lot of that you'll still see us out in addition to send Amazon.

In the Midwest, you'll have to sell some asset periodically, but the volumes will be much lower than what they have been historically.

Okay. Thanks, everyone.

Thanks.

And as we go to Dave Rodgers Your line is open.

Yes, Hey, Jude I missed some of your comments earlier, but.

Good sized deal I think you said 120 130000 square feet in a quarter how much was that a holdover from just kind of activity on pause maybe come March and April and came back to you versus how much of that goes back to the safety stock or the acceleration of E commerce and the need for space more eminently with their way to parse that out.

I don't know that much was a holdover, Dave I mean.

Most of what happen on the pause button I guess, if you look at our sector will happen in April.

So there was there was certainly more activity towards the end of the quarter for us So more of what got paused in April in early May went into June.

I will tell you.

When we did this call 90 days ago.

Our build to suit pipeline I think I'd reference at that time was down probably 30, 40% on prospect basis. I would tell you are building pipeline. Today is is every bit what it was.

Pre told that we felt like we would get some some transactions signed in the second quarter two.

Those inside that those didnt happen the timing slips also.

Back to my comments I made earlier about feeling good about the development pipeline going forward.

That's a good indicator for us it's something we tracked closely and we're happy to see it back at Threeq over at levels.

Helpful. And then maybe on the capital side you guys sell these Amazon building that you talked about Nick It really strong pricing have you guys thought about.

Joint venture fund or away to kind of keep the asset value up even higher than it is currently for you guys, obviously with debt under 2% willing to issue equity it kind of that 36 unchanged number.

Cost of capital only getting cheaper for you guys is there a desire to own more assets and try to keep more in house and look at other sources of capital as you move into the markets, where you want to be ultimately.

Yes, I mean.

We look at all the different levers to do that but right now primarily its outright outright sales of those assets.

And it anything good way to raise capital for our development and acquisition pipeline.

But given I get your comments, Nick that we're kind of down to the bottom of that and demand for build to students that could be growing should should we entered the you guys issuing more equity to be a component of that plan going forward.

I mean, I think it certainly could be Dave I mean, we did a little bit this quarter I would point out it's not overly material was a half a percent of our total share count.

But on pricing we're at now on if Nick confined to good acquisitions or Steve's team has good development transactions, we can issue a little bit of equity I don't think it'll be substandard, but we could issue a little bit of equity in the very accretive to our overall returns.

Great. Thank you.

Next we go to Michael Carroll with RBC go ahead.

Yes.

Yes. Thanks.

Steve I, just wanted to dive a little bit more in your comments regarding safety stock I mean, how widespread are those conversations.

Today, I mean, its customer base now that you have or they aggressively building space to hold more inventories are more just have a discussion point right now.

I would say, it's a discussion point, but it certainly coming to fruition and Scott.

Just sort of the known suppliers and our retailers you think about.

You think about E commerce and.

For those of you on this call that we're trying to order goods that your house.

During the pandemic and your 24 hour delivery window is not going to happen.

That's that's included in the discussions on safety stock as well right, which is just an increase in inventory levels. So.

Yes, I mean, it's active I think we're seeing it come to fruition more from from the ecommerce side right now, which is probably why some of the demand were seeing.

In the market is showing up on the ecommerce side of the equation.

Okay, and then like is it sector specific I mean are there are companies in certain sectors that are being more aggressive I guess the consumer discretionary it's on the like that.

You're referring to earlier or is it just more widespread and most of the major industries in the.

I think consumer discretionary for sure.

Beverage.

And they re we talked about the fact that.

There were 13 million users of online grocery a year ago and that number is like 45 million users.

Our online grocery today so.

Really thats been a big big area of growth as well and we're seeing that.

In our portfolio as well.

Okay, great. Thank you.

And our next question is going to come from.

Vikram Malhotra with Morgan Stanley go ahead.

Hi, this morning.

Thanks for taking the question I was wondering if you could comment on how construction costs are trending I know pre cobot things are getting a little bit more expensive and then.

In terms, how you see development yield trending.

Thanks.

This is Steve relative to construction cost I think we've seen.

I wouldn't say, we've seen anything that's not.

Thats out of the normal.

I think we've seen inflationary costs, there, but nothing out of the normal I would comment that land pricing.

No.

Probably for a very brief moment in time.

Dropped.

But is already back to what we call pre covert levels. So I think overall development cost or are probably in line with where they were to start the year.

Relative to the development yields I think it's a it's a function of market.

And and.

There are certainly as cap rates compress you started to see development rates.

Yields compressed as well.

Great. Thank you.

Next we will go to Mike Mueller with JP Morgan go ahead, Mike.

Hi.

And seeing more demand for larger spaces, just curious what's what's the size cut off there where you start to see that pickup in demand.

We track we track of a whole lot of difference that's over here.

We typically break off between under 100 100 to 250 and 250 to 500 over 500 in our portfolio.

We've been more active I would say in size deals over 250000 square feet.

Both in new deals in the market looking at available spec projects.

And then I'd tell you on the build to suit side.

Certainly more activity over 250000 feet.

We signed as we as we said we signed an 800000 square foot lease in southern California.

That was a spec project that was done in the second quarter.

For the building was complete.

Got it okay that was it thank you.

Our next question is going to come we're back to Mr., Eric Frankel with a follow up go ahead Sir.

Thank you I guess my concern for the question with Paypal.

I want to talk about the development pipeline thought about that is not pipeline can you.

In the Raleigh project that was.

Redevelopment will be back in service next quarter do you have.

Okay.

Property for portfolio, they're going to have to be reconfiguring income shape or form of that can be a common trend you've got.

Hi that Vandal too.

Yes. This markets you can chime in or add we have a few of those you're right. We had a project in Raleigh, It sort of a two building complex is a very weird set up and we sort of took that building off line late last year redevelop to kind of lease signed and that'll come back in service this quarter here.

I think we've got maybe a couple more of those yeah. So.

We've done them from time to time in the past or not overly usually not overly material or not a lot of them, but where there's a couple of amount there.

With all yet.

Thanks.

And once again for additional questions press, one zero in your phones keypad will going out to Nick Yulico with Scotiabank go ahead.

Hi, guys Cemetery again.

Something just spoke about which is a land pricing could you give us a little more color on how that pricing is trending across some of the key markets I mean interested to understand what the year over year sensation looks like that pretty speed bump.

On land prices.

Yes. This next I would tell you that.

There are distressed sellers of land right now.

Equally or we're looking at the coastal tier ones.

Land pricing has rebounded i. I would say, there's maybe a little less competition, but it's still.

Pretty tough to go find land, particularly in the more infill markets that are constrained.

Yes.

Thank you.

So.

And next up we have Kevin Kim with Fund Trust go ahead Sir.

Good afternoon guys.

So mark you had some really excellent execution on your unsecured note deal if your interest in 350 million at 1.85%.

I know you don't have much that come into the next couple of years.

And you can buy sell find Walker development.

So couple of questions one how does the breakeven math work.

With issuing at this type of that and buying back the other that.

Second with the availability.

And.

Access to capital does that make you guys want to think differently about capital deployment does it.

At all.

Making more inclined to do other things like Mezz lending leveraging our platform in your knowledge.

Yes, so Kevin I'll start.

Vials can add their thoughts as far as the breakeven on a tender offer we did.

You know, we weren't really targeting to get all that money and so the tender offer pricing that we put out there. We are really targeting you'd about 150 million of the 300, we were actually surprised and happy to get 220 million of it back into the pricing we offered.

In the way we looked at that breakeven was about 2.1%. So if you takes a 1.85% yield that we issued a new data that you factor in the what I'll call the debt prepayment penalty to buy back 220 million of the 3.9% coupon the breakeven to do that deal two years from now was 2.1%. So we don't.

That's pretty darn attractive.

And then you're right I mean, you overall cost of capital is pretty attractive right now and it seems like it continues to get more attractive by the moment. So I think it all comes down to you have to have it used from proceeds I think the balance sheets in great shape, we're not targeting to go out and just do any debt refinance or anything like that so it will all come down to growth opportunities on both the development.

And acquisition side.

And when those come to fruition will we have the balance sheet to take take advantage of it.

And the second question is there any noticeable difference in terms of.

Market rent dynamics within your core markets were purchased noncore markets.

Yes, Kevin This is Steve I think are what we define as our high barrier coast tier one markets have have performed better.

I'd say, 5% or two that are than our other markets.

But by and large we're seeing good rent growth.

Probably every market except for Houston.

That's been one market thats been tough for US I think is gotten us headlines from others as well, but but pretty pretty good across the board, but certainly better and obviously in high barrier tier one markets.

Okay. Thank you.

Oh My last question comes from Rich Anderson with this BC go ahead.

Rich Anderson with SMBC your lines open Sir.

Great stuck in there I mean on.

Okay.

First on on the topic of the use E commerce versus.

No other good set since it bricks and mortar retailers are establishment I assume I think I know this requires more junkier terms with the packaging.

For E commerce utilization and hence perhaps more need for space is that as I have a real impact on on space needs.

Commerce become significantly more of.

The flow of activity and some of your warehouses, where you just need more space because the packaging is more sort of.

Substantial.

Yeah, I mean, I think the staff is widely used is for a billion dollars of retail sales, it's 1.2 million square feet of of.

Warehouse space needed ecommerce.

Commerce as our about.

And I think it's.

Whether that whether that's plus or minus as pretty accurate. We've seen that when you look at historically when you look at ecommerce sales and you look at industrial absorption and demand.

So yes, we definitely see that I mean as you as you outlined in your explanation.

And so it's a way packages or our one packaged into the way they are shipped out of the warehouse, they're not going in massive.

Alex go into stores and get broken that right.

So 20%.

Increased essentially.

Right Okay.

And then.

And I might've missed this I got on a little bit late but the the.

The behaviors of your tenants in terms of inventories are you seeing.

Perhaps it's good specific but is there.

Lean towards having more inventory rather than less I'm, just curious if theres been any change in behavior there.

Now, which we track.

We track utilization in our and our and our warehouses and that was a year ago that number was an all time high of about 92% that's come down closer to 90, I don't know I can't tell you whether that's the fact that inventories have been somewhat depleted because the supply chain problems.

And our conversations with customers.

Customers or not we don't have anyone given us back space, we haven't had.

Any sort of.

No.

Surgeon sublease space within our portfolio.

So.

I can't tell you whether that 2% change in utilization is a material trend or not.

Okay. That's all I have thanks.

We have no additional questions in queue at this time.

Thanks, John had thank you everyone for joining the call today.

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