Q3 2020 Duke Realty Corp Earnings Call

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Ladies and gentlemen, thank you for standing by welcome to the Duke Realty third quarter earnings call. At this time all participants are in a listen only mode and later, we will conduct a question and answer session instructions will be given at that time.

Should require any assistance I think he is call. Please press Star then zero and as a reminder, this conference is being recorded.

I will now turn the conference over to your host Ron Hubbard. Please go ahead.

Thank you Josh good afternoon, everyone and welcome to our third quarter earnings call. Joining me today are Jim Connor, Chairman and CEO, Mark Dineen, CFO, Steve Swain, our Chief operating Officer, and Nick Anthony Chief Investment Officer before.

Before we make our prepared remarks, 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 and future results for more information about those risk factors, we would afraid to our 10-K or 10-Q that we have on file with the SEC and the company's other SEC filings.

All forward looking statements speak only as of today October 29, 2020, and we assume no obligation to update or revise any forward looking statements.

A reconciliation to GAAP.

Non-GAAP financial measures that we provide on this call is included in our earnings release.

Our earnings release and supplemental package were distributed last night after the market close.

You did not receive a copy these documents are available in the Investor Relations section of our website at Duke Realty Dot Com you can also find our earnings release supplemental package as you see here.

Ports and an audio webcast of this call in the IR section of our website as well now for our prepared statement ill turn it over to Jim Connor.

Thanks, Ron and good afternoon, everyone first of all I Hope you and all of your families are healthy and safe as we all endeavor to get through this pandemic.

We had a great quarter and the outlook for our business is very bright.

Demand for our state of the art logistics space continues to remain resilient amidst the volatility volatile economic environment and the even recovery that's underway.

The consumer remains relatively healthy on a spending front with advanced August and September retail sales numbers up four and 6% year over year, respectively.

Commerce sales were up over 40% in Q2 and estimates for full year growth 2020 or north of 30%.

On line sales activity remains robust with ecommerce penetration rate as a percentage of total retail sales rising six seven percentage points. So far in 2020 and expected to maintain at that penetration rate going forward.

Numerous cargo transportation indices have also turned positive recently with rail cargo and truck tonnage both up about 5% year over year and now only slightly below peak levels.

Also the last two months of inbound of Westower West Coast container traffic has been up 11% to 14% each.

Each of the last two months all good indicators for the holiday season, and perhaps the inventory restocking themes, we've been talking about.

Nationwide real estate fundamentals for the quarter also ended up relatively strong given the surgeon leasing primarily from E commerce or omni channel oriented firms as well as third party logistics firms. The result was the 47th straight quarter of net absorption. Despite many forecasts predicting the opposite.

Even more encouraging has been the resiliency and performance of our portfolio.

Third quarter, we achieved 32% rent growth in rental rates on a GAAP basis, 17% on a cash basis.

We started four development projects totaling $261 million with solid value creation margins.

We have a strong pipeline of build to suit prospects, which in total is back above pre covert levels.

We signed 7.3 million square feet of leases, which contributed to a 30 basis point increase in total portfolio occupancy to 95.6% leasing.

Leasing was fairly broad based across industries with about 30% of it tied to E commerce.

In our monthly rent collections remains very strong at 99.9% for the quarter, including executed deferral agreements.

The end result is our year to date performance and full year expectations now exceed our beginning of the year expectations based on these results at our optimism for the balance of the year, we have raised the dividend and revised our guidance metrics Mark will go over these changes in detail momentarily now let me turn it over to Steve to cover our real estate operations in more detail.

Thanks, Jim in the third quarter. The US demand was 50 million to 77 million square feet and delivered for deliveries were 68 million square feet. This resulted in a flat vacancy rates from the previous quarter of 4.7%.

For the full year the major research firms project deliveries in the mid 200 million square foot range and demand to be 160 to 170 million square feet.

Given this outlook, we expect a high four to maybe 5% vacancy rate nationally.

On the rent side CBS estimate nationwide rent growth for this year to be in the mid single digit range.

For next year early projections for demand and deliveries remain in the 250 million square foot range with an historically high pre leasing estimate those deliveries this bode very well for the market to remain in balance as.

As I noted on our last call and for recent CBRN JLL forecasts, the intermediate and long term demand situation is very favorable for our sector.

We had an excellent quarter on the demand front with total leasing volume as Jim mentioned of 7.3 million square feet for our portfolio.

Our team did a great job of pushing rents with rental rate growth on new leases, 32% on a net effective basis and 17% on a cash basis as.

As you saw from our press release last night or lease renewal rate of 46% or 67% when including Backfills was lower than historical levels part.

Part of the story here is a one just the sheer volume of leasing was considerably lower than average and to our high occupancy levels and strong rent collections, we're continuing to aggressively push rents. So that also has some impact on the number one.

One of the more notable leases signed this quarter was a 1.1 billion square foot new lease for 100% of our speculative project under construction in the inland Empire, California.

The facility is not expected to go into service until the second quarter of 2021.

A great example of our team's success in leasing speculative developments well ahead of our underwriting.

As we noted on our last call and as referenced by CBRC Research. There continues to be opposed pandemic trend to larger lease sizes in our own and our own portfolio. During the pandemic, we realized an increase in the average lease transacted by about 38%.

As we have emphasized before we believe the size and term of our transactions.

Our modern portfolio features and the credit profile of our tenants represents and Oliver element of differentiation and stability in terms of our portfolio cash flow and speaking of cash flow I'll give you an update on rent collections as most of you are aware and per numerous sell side research reports Weve reported some of the very best collection rates and the entire arena.

Industry since the onset of the pandemic.

Our monthly collections have trended better every month since the start of the pandemic and amounts due under deferral agreements have been fully collected.

Some tenants have even repay their deferred rent ahead of schedule to avoid interest charters.

For the third quarter and including the month of October as well, our overall collections have averaged 99.93%, including the executed deferral agreements on the new development front as we noted on our late July earnings call and the demand the demand for newly developed logistic space was coming back strong and then we plan to commence new.

Projects very soon during the third quarter, we started four new projects totaling $261 million in costs.

That were 28%, 28% pre leased on average two of the starts were speculative projects totaling 1.4 million square feet in Southern California, and Seattle markets. We also started to the 220000 square foot project in Miami that a 72% pre lease.

The fourth development was a build to suit project totaling 415000 square feet and Eastern Pennsylvania for Rick has been Keezer health. This was our second build to suit project for Reckitt.

There is a global manufacturer lysol wipes and other healthcare product products.

In summary in the third quarter was a great reflection of the health of logistics market and the strength of our portfolio.

I'll now turn the call over to the next to discuss the acquisition in this environment. Thanks, Steve on acquisitions, and we continue to be strategic and proactive had a lot of good investment activity. During the third quarter. We closed on four transactions to acquiring total five to sale lease buildings totaling 680000 square feet.

Total cost of $112 million.

The assets are all located in coastal tier one market with three facilities in northern California.

When the Seattle market and one in northern New Jersey.

We are working on three of the four transactions pre co that we're able to transact and slightly lower purchase price discounts that are not available in the market today.

All these transactions have certain attractive long term return characteristics such as below market rent.

The cash for redevelopment and or were lightly marketed.

Overall, we believe we acquired these assets more replacement cost Unlevered IR, our expectations in a low 7% range.

This quarter is Austin example, our acquisition opportunities can be lumpy quarter to quarter as well as an example that we are mainly focused on single asset transactions with a potential to capture a yield premium.

On the disposition side, we closed on the sale of the 280000 square foot building in Indianapolis for eight to 18.5 million at a 5% cap rate.

As I implied by our 20 as implied by our 2020 disposition guidance of a $300 million mid point, we have a number of disposition transaction expected to close in the fourth quarter.

These deals are on the final mortgage stages or under agreement.

Some of these assets as well as future dispositions include Amazon of attack as we manage our overall exposure given the significant amount of business. We continued to transact on with his key customer.

I'll now turn it over to Mark to discuss our financial results and guidance update.

Thanks, Nick Good afternoon, everyone core FFO for the quarter was 40 cents per diluted share compared to 38 cents per diluted share in the second quarter of 2020, and 37 cents per share in the third quarter of 2019, the increase to core FFO in the third quarter of 2020 compared to the.

Second quarter was driven by higher occupancy and rental rate growth as a result of favorable collections history and updated credit reviews, we reversed approximately $486000 of reserves on straight line receivables during the quarter or recording nearly no cash bad debt expense.

We reported FFO as defined by ne read 39 cents per diluted share for the third quarter of 2020 compared to 33 cents per diluted share in the second quarter of 2020, the increase in the third quarter as a result of losses on debt extinguishment recognized during the second quarter as well as the same factors that drove the increase to core revenue.

FFO is defined by May read was 37 cents per diluted share in the third quarter of last year.

AFFO totaled $135 million for the third quarter of 2020 compared to $120 million for the comparable period of 2019. This increase in AFFO is due to the earnings growth that drove the increase in core FFO and overall continued improvements in leasing economics same pace.

Operating annualized growth on a cash basis for the three and nine months ended September Thirtyth 2020, compared to the same periods in 2019, with 5.0% and 5.5% respectively same property NOI growth for the quarter was driven by increased occupancy rent growth and the expiration of some free rent periods.

Same property NOI growth on a GAAP basis was 3.6% for the third quarter and 2.7% on a year to date basis.

From a capital standpoint, our leverage metrics remain very conservative with debt to EBITDA on a trailing 12 month basis at five times consistent with the midpoint of our guidance our current quarter annualized basis debt to EBITDA was 4.6 times.

Coupled with our substantial leverage neutral funding capacity, we have multiple levers to pull for raising new growth capital at very attractive pricing with the current state of the capital markets and state of the investment sales market I'll remind everyone that the capital deployed into developments is that a strong pre leasing level for example of the 3 million square feet of.

Projects being delivered in the next two quarters. They are in aggregate, 93% pre lease with a mid 5% expected stabilized yield and thus are immediately accretive to earnings also our near term development prospects are heavily tilted towards highly pre leased in build to suit projects.

I would now like to address the changes to our 2020 guidance, we've made which are based on our better than expected third quarter results and a continuation of our optimistic outlook for demand and tenant credit worthiness first.

First we've increased our guidance for core FFO to a range of $1.50 to $1.54 per diluted share from the previous range of $1.48 to $1.54 per diluted share, which equates to a one cents per share increased.

The midpoint compared to our last guidance update in July.

The increased guidance for core FFO is driven by our strong leasing results, thus far as well as a lower estimate of bad debt expense for the remainder of the year page 16 of our supplemental information details our bad debt expense estimates.

For similar reasons to core FFO. We have also increased our guidance for Narita FFO to range from $1.38 to $1.44 per diluted share from the previous range of $1.35 to $1.43 per share.

Also driven by the same factors as our updated guidance for core FFO, we've increased our guidance for the growth and adjusted funds from operations on a share adjusted basis to range between 4.6% and 7.7% comps.

Compared to the previous range of 3.1% to 7.7%.

For same property NOI growth on a cash basis, we've increased our guidance to a range of 4.7% to 5.1% from the previous range of 3.5% to 4.5%. This increase in guidance as a result of our leasing progress to date continued rental rate growth and lower expectations for bad debts for remainder of the year.

Based on our continued progress in leasing up or speculate developments as well as our solid pipeline build to suit prospects. We've increased guidance for 2020 development starts our revised guidance of between $650 million and $850 million compared to the previous range of $350 million to $550 million.

Also as Nicks team has been successful at finding some one off acquisitions in coastal tier one markets, we've increased our guidance for acquisitions.

Two 225 million to $325 million compared to the previous range of $50 million to $250 million.

They did a couple of more couple other components our guidance based on our more optimistic outlook as detailed in a range of estimates season, including our supplemental information or website now I will turn it back over to Jim for a few closing remarks. Thanks.

Thanks Mark.

Our quarterly results were strong highlighted by solid leasing, particularly in the speculative development pipeline the achievement of 32% rental rate growth and a rebound in our development starts.

While we are mindful of continuing macroeconomic and political risks are resilient performance. The last two quarters and the continuing strong demand themes should provide opportunities for us to continue to drive earnings growth. This confidence was reflected in last night's announcement that our board of directors has approved the raised the quarterly dividend by two cents.

A share or over 8.5% over the previous dividend rate.

With that we'll now open up the lines to the audience I would ask that participants keep the dialogue to one question or perhaps two short questions and you of course are welcome to get back into queue. Josh you May open up the lines that we are ready to take our first question.

Well, ladies and gentlemen, if you would like to ask a question press one than zero and utility keypad.

And our first question is from the line of.

Eric Frankel with Green Street. Please go ahead.

Thank you Justin.

Just a couple of questions.

Question, We will first just regarding your leasing activity. This quarter. Obviously it has broken the law will be to volume.

Comment maybe on the lease term that does seem to be a little bit sure that unusual, especially for the renewals.

Yes, Eric this is Steve.

I think overall activity for the quarter anytime were over 7 million feet in our portfolio, we feel pretty good about it obviously, our occupancy levels are fairly high as well so.

And then in terms of the shorter term.

Theres not a lot to read into there I think we're.

Still year to date, we are we're on par with where we were at 19 in the quarter was a little shorter it at a little over three years, but that's just a couple of a couple of transaction sample size.

Great.

Thanks, and just another quick follow up given regarding your capital allocation activity.

How are you thinking now about about acquisitions and dispositions going forward here, obviously, you're able to fine.

A couple of pre koby deal to bring them across the finish line.

And we do plan to kind of match go kind of fun to match fund acquisitions with dispositions or anything any more programmatic. We think over the next couple of quarters next year.

Hi, Eric this deck.

Yes, I would say generally we are going to match fund we continue to be.

Very opportunistic on the acquisition side and very focused geographically on the coastal tier ones, but I think you will see the acquisition just as your volumes kind of be equal to each other.

Okay. Thanks, guys.

Our next question is from the line of.

Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks, Good afternoon Nick.

Nick just to follow up on acquisition strategy.

Can you talk about whether you are looking for core buildings in those markets that you want to increase allocation to which I kind of look like was with part of the drive behind some of the acquisitions this quarter.

Or is the focus going to be more on deals with vacancy upcoming rule any other value add component and how much of a differential if any is there in pricing for core versus value add at this point.

Well first of all I would tell you that most of the acquisitions are and be focused on lease product.

Because most of the vacancy that we take on we do on the development side.

Basically we are teaming up with our development teams to find.

Assets that are below market, we can buy below replacement cost or theres happens to be at redevelopment play going forward.

So thats generally what we're focused on we'd love to buy some corp. Some some class a newly developed assets and very infill markets.

But the pricing on those have been pretty aggressive recently, most notably there was a deal in southern California, the trade into sub three and a half cap rate. So we are still being prudent with our capital and just trying to find assets assets that aren't quite.

As fully marketed as some of the others.

Great Thats helpful.

Just a follow up on that cold storage is seeing a lot of positive momentum from the pandemic you guys bought a cold storage facility in the second quarter last year, but I'm not sure you've done anymore. Since then can.

Can you just talk about whether you guys would consider expanding that part of the business. The new yeah, I guess your appetite for cold storage going forward.

Well, we like the product we like the asset we purchased we have pursued and probably we'll do some old stories on the development side.

There is not a lot of opportunities, though I would tell you. So it's never going to be a large part of our business. As we've said before we are not intending to be operators of that that product type. So we're really looking for asset that you can actually lease back to other operators.

And frankly, it's tougher to find those assets and the coastal tier one markets.

Got it thanks.

Our next question is from the line of Jamie Feldman with Bank of America. Please go ahead.

Thank you.

I appreciate your color on the expected supply next year I think you said 250 million square feet, which would be about the same as this year.

How do you think about your development pipeline do you think it would be pretty similar as well as you're kind of starting to pencil out.

Possible for the next 12 months.

Yes, Jamie I'll I'll, let Steve to add some color I think.

Clearly, we're feeling much more comfortable about the development business in 21 than we were even just a quarter ago are you know the.

The performance of our portfolio has allowed us to start building speculative again and Thats always been.

Roughly 40% of our development pipeline so.

If we can continue to do speculative development I think you'll see us.

Return to historical levels that you saw us operate in 17, 18, and 19 and Steve you want to give the color inkjet Jamie the only other thing I would add is you've heard us talk in the past about our.

Our build to suit pipeline and the.

Attention, we pay to that in terms of the the confidence of our customers and and what that pipeline looks like I'll tell you that pipeline today is as high as it's been.

In this cycle in terms of active prospects. We're looking at so we feel good about the we feel good about where the directions headed for development for us.

Yeah, you I guess you accommodate about even your fourth quarter starts sound like they'd be pretty heavily weighted towards build to suit when do you think that.

He will continue on with that pipeline and then.

Get back to a 40%.

Kind of 60% spec, meaning like even incremental over whats in the pipeline or you will kind of keep the same size.

Just be more build to suit for a while longer.

Well I think the answer lies somewhere between I think you know divested Steve is trying to convey is the build to suit pipelines as strong as it's been in the last four or five years. So obviously, we see a lot of.

Significant opportunity there I think you could plan.

On us continuing spec.

At a slightly more elevated rate that we are this quarter again as long as the market will bear our our portfolio performed well and the markets continue to perform well. So we're not in a hurry to ramp that back up it's not like we're trying to achieve a certain spin.

Specific number or target.

We're very comfortable with the revised guidance that we gave given everything that we see in the marketplace and I think next year that you know as long as the trend holds true again should should recover nicely.

Okay, great. Thank you.

Our next question is from the line of Dave Rodgers with Baird. Please go ahead.

Yeah, good afternoon guys.

Nick maybe just another one on investment sales, what what do you see kind of going into the end of the year is activity kind of coming back to normal for the fourth quarter in terms of investment sales transactions nationally and your ability to participate in those and your thoughts around cap rates heading into the end of the year and into early 2021.

Yes, David it's going to be very active in the fourth quarter for us and everyone else.

Everybody took a pause.

Earlier in the year and now everybody's racing to the finish line to get a bunch of deals close by year end.

As I've mentioned before cap rate clearly have compressed we're seeing trades now.

Proving that out and I would say, it's pretty broad based.

We've seen some three and a half and southern California, four and a half in Atlanta, and we've seen some five while below sub five in Indianapolis.

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It's a good mix a lot of them are Amazon transactions, but there is a mix of plenty of others out there to prevent those cap rates compressed.

But there's a lot of demand from investors either investors getting back into industrial rotating out of other product types and obviously the interest rates are off also fueling that activity as well.

Okay. That's helpful. And then maybe just to stick with the development theme.

Can you talk about construction cost land costs, what you're seeing out there and then in terms of kind of where you think you can achieve in terms of development margin on the project that you are starting.

Here in the second half of the year.

Sure David Steve.

Yes, I think land land prices have continued to be.

Sticky if not increasing right.

Certainly the margins we want to invest in.

Construction cost I'd say or.

Historically moderating in terms of their increases probably in the low single digits on an annual basis in terms of costs.

And then you know margins on the development side, we've been pretty consistent with with our margins I think we've been north of 30% on our margins.

As Jim indicated mixing in the build to suits, we like the risk adjusted returns on those deals and we've been pretty consistent in our portfolio of produces margins that are that are 30% are better.

All right great. Thank you.

Our next question is from a line of Omotayo Okusanya with me.

These hoo. Please go ahead.

Hi.

Good afternoon, everyone and we got rid of develop just talk a little bit about where you would expect those development to be over the next.

Six to nine months.

Sure I would tell you we like the coastal tier one markets, others that'd be southern California.

Born in Northern California, Seattle, New Jersey.

Miami.

Theres Theres a handful of other submarkets.

In some of the other cities we operated than that.

We've got good positions that we think the opportunities right, we pull the trigger on that but certainly.

Certainly those five markets from a broad perspective.

Okay, Great and if I think about one quick follow up.

Pass things to annualize, 5.5% year to date, playing a pretty good guidance Thats four nine so it implies a deceleration for Q1 could you talk a little bit about that.

Sure.

There's a few moving pieces, there and I think part of it is just timing from quarter to quarter.

A couple of those moving pieces, if you look at our.

In the third quarter of 20 compared to the third quarter of 19 and really the whole first nine months.

We're up about 60 basis points in occupancy so we've had a big uplift in.

Same property NOI because of occupancy, but then when we get out to the fourth quarter, we had a really high occupancy comp in the fourth quarter last year. So we're really projecting occupancy to be pretty flat quarter over quarter in the fourth quarter. So thats part of the reason there another one that's really.

Impacting the third quarter positively and negatively in the fourth quarter is free rent burn off.

We had a little bit of free rent burn off in the third quarter of this year compared to last year. So that was an uplift not signaling of a little bit.

Really front and the other way in the fourth quarter, we have a little bit of extra free rent in the fourth quarter. This year compared to the fourth quarter last year. So it's a little bit of a negative. So I just look at that and a little bit of timing and then the final part of final reason as bad debt expense as I mentioned earlier, we had no bad debt expense in the third quarter. This year.

Sure.

We have in our guidance about $500000 of bad debt expense in the fourth quarter.

Hopefully that doesn't happen, but thats baked in the guidance. So a lot of little moving pieces that no one individually as a big big factor most delicious plant.

Great. Thank you.

Our next question is from the line of Brent did with FBR. Please go ahead.

Hi, Thanks.

I heard your comment on improved rail and ship volumes. So could you just talk about how well you think supply chains are prepared for an acceleration in the pandemic. This fall and winter just assuming that pace.

Celleration keeps up for a little bit.

Yes, I can give you some high level and Steve can can add some color as well you know there's a there's a couple of components I mentioned in my remarks, you know the the inventory restocking and obviously.

And with the amount of.

Good that had moved thus far this year, there's a tremendous amount of of restocking of inventory.

And then second to that is the concept that we've all been talking about for the last couple of quarters.

Which is the safety stock to or increased levels of inventory of the us and I think both of those are driving.

What we're seeing in terms of demand that would be supported by the increased transportation numbers that we're seeing.

Most more recently so Steve you can add some color to that yes, I think the only thing I would add is where we are is engaged with our customers today as we probably ever happened given what what all of us have gone through.

There's there's a lot of talk out there about supply chain resiliency about where products are coming from you know theres theres articles everyday about delivery times from from E Commerce and fulfillment centers Theres.

Theres Theres up Theres, a lot being done on the on the restocking side of things. If you look at the inventory to sales and the and the retail category Thats as low as its been.

Maybe ever in the history of about 1.2.

Time, so theres a lot of talk going on and I think we'll continue to see this drive volume in our sector for for the near future.

Great. Thanks, and then just one quick one on tenant concentration.

Both regards to Amazon, but just more broadly how you're thinking about that as the business moves towards greater penetration of ecommerce.

Well, if you asked me today I like Amazon.

Given everything that's going on in the world.

We're pretty comfortable having an a rated.

Company as a client that's.

Growing as rapidly as they are but all kidding aside we recognize that concentration.

We have been looking at a number of alternatives.

We have mentioned in the past selling.

Some Amazon in individual assets as we have historically done.

Over the last few years and so I think you'll continue to see us.

Focus on managing it at the corporate level through.

Through those types of vehicles.

Okay, great. Thanks, guys.

Our next question is from the line of Rich Anderson with FBR.

BC. Please go ahead.

Thanks, Good afternoon, everyone.

Hey, rich so.

I asked this question to one of your peers last.

Last week I think but.

What do you make of the idea that.

Post Cove, it things actually start to slowdown for your space you're kind of.

Fast tracking E commerce here, it's like shot gunning, a beer instead of shipping it quietly nicely.

And.

And a lot of a lot of the good stuff is coming through like a fire hose at the moment.

Is there a chance that this.

Beyond the in this environment, which we're all hoping for quickly I could actually slow your business down on the other side of it.

Rich I'll start out eight.

Theres always there is always a risk, but I think one of the things that comes out of situations. Like this is these trends never completely reverse themselves. So I don't think people are going to go back to.

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Not doing any online grocery shopping or going back to pre pandemic levels.

No I think ecommerce companies feel very comfortable that the level of conversion that they've had in the last couple of quarters.

They think they can keep the vast majority of those of those clients, but the other thing I would point to is let's go back to pre co bid we've been on a pretty good run lot of that obviously driven by strong and growing economy, but a lot of that is also supply chain revitalise.

In addition, you know existing retailers and consumer products company, having to invest heavily in their supply chain to compete with the E Commerce companies.

Weve talked before about the need to be able to get product to the customer inside of 48 hours of your supply chain doesn't allow for that that's a problem.

We've talked in the last couple of quarters about re shoring or near shoring.

Giving given some of the issues with.

With China that don't appear to be going to go away anytime soon.

A lot of our customers have been seeking alternative sources.

And trying to get product.

Closer to the U.S., if not within the us to alleviate some of those issues. So I think the combination of all of those things would tell you that we're in a pretty good spot going forward. There is always the risk that you that you mentioned, but I really don't think thats very significant.

I think we'll continue to go in the direction we're going.

Okay, and then one of the.

Problems, if that's if the problem I don't know about your business, it's hard sometimes to know exactly how much current ecommerce is playing a role in your in your.

In your leasing activity in your tenants and all that sort of stuff.

Does this environment sort of sort of excavate out some in some observations about how much ecommerce is really playing a role and you actually become smarter about your tenants in the aftermath of all this because of what has happened.

Well I would answer your question this way it might.

The answer is yes E commerce is probably a bigger driver than people given credit for first you have the Amazons and the true ecommerce companies that are out there are consuming a large amount of space. Nobody is denying that we talked about ecommerce being roughly 30% of our volume last quarter. That's that's absolutely true the other.

Opponent is you've got.

Our omni channel customers that are doing distribution to other retail clients, they're doing their own online sales, maybe they're doing distribution to their own retail stores.

That component again being driven by E commerce and changes.

Is forcing those companies to make investments and then the other is the traditional retailers.

Whether you're talking about target or Walmart or home depot or lowes or any of these companies are investing heavily in their supply chain to match what ecommerce can do so I think aside from pure ecommerce consumption of our space of the sector, it's driving a lot of additional consumption of our space sector.

Okay, great. Thanks very much.

Our next question is from the line of John Kim with BMO. Please go ahead.

Thanks, Good afternoon that 30% ecommerce market share of leasing that you just mentioned was up from 20% last quarter and I'm. Just wondering if you expect that percentage to continue to increase.

And then also what other industry and the increasing demand and roughly what industry PC waning demand.

Sure I think I think we will see ecommerce continued to be.

A big chunk of the activity, we're doing and that May vary and as Jim said between retail and Omnichannel and Threepl that are doing work with E. Commerce, sometimes it is hard to decipher how deep that goes but clearly it's the largest driver in our business right now outside.

Outside of that I mentioned Threepl is whether that's ecommerce related retail related suppliers.

Manufacturing Assembly we've.

We see that being a good driver of space consumer goods, Mick I mentioned.

Our build to suit with Rick had been keezer.

Yes, thats somewhat consumer good healthcare related and then the final one which someone mentioned earlier in a comment or question was the food and beverage side, not just cold storage, but.

Dry goods as well food and beverage continues to be a very active segment for a for us and the sector as a whole.

On the acquisition opportunities that you guys mentioned focused on tier one market can you share any other characteristics.

Looking at the target Marbach Britain.

Buck stable asset versus as it with other opportunities.

So for.

Yes, I'll give you. This is Nick I'll give you a little bit of color on this quarter's activity, which I think will be similar to what we see going forward.

For example, we transact on asset Northern California, where we did a short term sale lease back that we expect to redevelop it 20% margins.

And in the future.

Our New Jersey, we found an asset that was leased well way below market about 50, 60% below market.

It does it isn't covered by a long term lease, but we are buying it at well below land cost. So we'll be able to get a good return from it with good bumps then hopefully that will be a redevelopment at some point in future potentially.

We also bought transaction in Oakland that has good access the I 80 in frontage to it as well those.

Those assets are well positioned slightly below market below replacement cost and we'll probably as a whole and lease those on a long term basis, that's kind of what we're looking for like I said earlier, we havent that take on a lot of vacancy risk on our acquisition since we get the bridge transaction largely because most of that is.

We take that risk on the development side.

That's great color. Thanks.

Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi, everyone. Good afternoon.

You introduced disclosure regarding short term leasing an early renewal.

And as of Threeq It looks like the year to date short term leasing is already higher than full year 2019 in square footage and the early renewals are also significantly either then.

Then plenty that same level of course, just wondering what's driving you completed.

Okay.

Okay.

Hey, Caitlin, it's Mark I'll cover the early renewals and maybe Steve can talk about the lease term.

The main driver of the early renewals or to basically extensive lease terms on some assets that were looking to transact on from a disposition perspective. So these are assets that will probably close.

Either yet this year or early next year, and it's really just a lot of tenant into longer term leases to increase our value on the disposition side. So thats really the driver of the early renewals and then I'll, let Steve comment on the lease terms, yes. The lease term some of the short term leasing I think was done in the second third quarter.

Where there was a little bit more uncertainty in the market early early late in the second quarter and early in the third quarter.

I think you will see that taper off again some of those are larger transactions that wind up holding over an extra month or two.

I wouldn't I wouldn't read anything into it.

From a from an overall macro trend for us or the market.

Got it and then another I think straightforward one in terms of bad debt.

No the day, three key with lower than expected and 2020 guided down prior to that I think it doesn't have died doesn't quite soon so is it that there were specific tenants that you had been watching and if so then I'm wondering kind of what's the outlook for them and I would add at the way or was it just that you had kind of an amount to be.

Conservative than you did not.

You know I would say that the there's really nothing new out there from.

The troubles me.

In fact I can.

We continue to be surprised on some of the folks have been watching to get caught up we've even had tenants that we gave deferrals to that are paying them off early to avoid interest charges. So I continue to be pleasantly surprised overall from a collection standpoint, the ones that were watching that made up the risk that made up the majority of the reserves, we took and are sort of.

Baked in that potential fourth quarter or the industries that are really impacted by coal.

Things like travel leisure.

Entertainment hospitality of that planning.

Companies like that to truly are are really suffered from coal that they continue a lot of them most of them continue to pay us, but they are the ones that we kind of watch the most it's not like we have a lot of exposure to those industries, but that's really what's been on our watch list and continues to be there.

Got it Okay I think the only thing I would add to that is most all those in addition to the industry's there in general.

Typically are on the smaller tenant side as well so they just worry me a little bit from their overall, where.

Where resulted to withstand it there's another shutdown or something like that but most of them actually continue to to be current on their rent.

Hi, Thank you.

Yep.

Our next question is from the line of high bin Kim with two it. Please go ahead.

Thanks.

Hey, guys.

So I'm looking at your development pipeline.

For the progress that you've delivered over the past couple of years.

The yields have ranged from the kicking the half to 7%.

And the current projects that are under construction that yield is 6% now.

Obviously, a mix issue and you're doing a lot more in California for the yields by nature should be lower.

But then you get your land bank, which you've been eating into and that you have to we know that land bank with more market price plan Im just curious about what the next couple routes of development, what kind of yields we should expect if there should be further compression that we should just be thinking about.

Kevin Let me start on the land piece I mean, you're obviously right reloading it market level pricing that.

Drive costs up, but what I would tell you is in the markets, where we've been doing the.

The on the coastal markets, where we've been doing land, it's all that market because as soon as we buy that land it really goes right into production.

As we can get it entitled So it's not like.

Our yields in the past had been inflated based on lower land prices. If you will we always the yields in those markets are always with land prices have Mark and then I'll, let Nick or Steve add to that.

Clearly that the.

Change in yield this is based on our geography the mix of the assets, we obviously were doing.

More development in the other major markets at slightly higher yields and as we've grabbed day to do more coastal tier one development, that's what's driven down the yields there we continue to see good margins, but land is getting expensive and something that we deal with every day in our business and we'll continue to manage going forward.

Okay. Thank you.

Okay.

Our next question is from the line of Mike.

Mueller with JP Morgan. Please go ahead.

Yes, hi, good.

Wondering have you been seeing anything different in terms of development lease up times compared to prior years, maybe maybe ignoring what happened during the locked down, but just thinking about now and kind of going forward.

No. This is Steve I would tell you.

We as a standard practice, we underwrite one year lease up timeframe on all of our new developments that are that are spec.

We've we've averaged we beat that by.

By about three or four months on average.

So I would tell you we continue to see good pre leasing activity in our portfolio.

We are just talking today about about southern California, and I think we've done 10 projects in in and around the inland Empire 10 spec buildings and Weve Preleased nine of those before.

Before the end of construction. So I think we see that as a good sign for the health of our markets.

Okay, Great that was I think.

Thank you.

Our next question is from the line of Eric Frankel with Green Street. Please go ahead.

Thank you I just want to get back that we see question did you don't mind first.

Earlier, but your early lease early renewal early renewal with excuse me that was affecting your cash rent growth was it.

It is not Eric I mean, we don't count. Those these are early renewals are deals that are renewed two years before there.

They are up so even if we were to count on it would be misleading because you wouldn't get to that pop for two more years and like I mentioned on an earlier question well actually never get the growth anyway on those because they were done in connection with assets were going to sell.

So they are not about what that is.

Yep, Okay, great good to know.

Then related to that on the cash rent growth figure. It sell can you provide a rough geographic mix, that's kind of where that shaking out maybe where there are few more coastal market leases that roll down during the quarter and then maybe that navigant to also trend.

Got them, how rents are generate trending I know you've been you're thinking that copel market rents or are they going to continue to grow but maybe you can talk about what you've seen over the last couple of quarters.

Eric I'll cover whats in the current numbers and Steve can touch on what we're seeing.

Actually the did leases, making up our growth really for this quarter. It really for the year is really.

Pretty indicative of our overall portfolio so its not heavily driven by any one market. So.

So for example, if our coastal market exposures, 35% thats about the percentage of deals that said that from the coastal non coastal Conversely, so yes.

Yes, the only thing I would say is you got to remember that a lot of these.

Non coastal markets, while maybe the year over year rent growth has not been quite as dramatic.

Dramatic as the coastal markets a lot of those leases we have an older vintage older vintage leases. So our mark to market on those is still very healthy and then I'll, let Steve talk about what we're seeing I think consistent with what Mark said.

Eric we've seen we've seen better rent growth and the highbury across the markets.

Seattle, New Jersey, Southern California in particular have been have been very strong markets for us.

In terms of the other markets.

Mark covered again, we've gotten we've gotten pretty good growth probably the one that's been a little challenging for us has been Houston.

That'd be the one market I'd point out where where that's been a bit of an outlier to the other way.

Gotcha. Thanks, Thanks for the color.

Our next question is from the line of Jamie Feldman with Bank of America. Please go ahead.

Hi, I guess, just a similar question not rents, though but just cap rates can you talk about where are you seeing the most cap rate compression.

Across the market.

Jamie it's been pretty widespread I would tell you.

Obviously, we've seen I would say, it's probably been 25 to 40 Bips as.

As you see more deals Theres a lot of rumor trades and then you actually see the trades, we're going a little more comps how much it is compressing.

Like I said earlier, we saw a sub three and a half trade in.

Southern California, we've seen a sub.

Four and a half in Atlanta, and then we have seen.

I think a four well having traded yet.

Trades quite a bit lower than a five cap closer to four and a half on the east side of Indianapolis. So it's been pretty widespread obviously, there's still a bit.

Broad range not not every deals obviously, that's those are those are the record cap rates.

You are still seeing something higher depend on what it is and where it is and where the market rents are but it's pretty widespread.

And the 25 to 40 thats over what time period.

I would say from pre committed to do that today.

Okay.

Alright, great. Thank you.

Our next question is from the line of Emmanuel.

Cushman with Citi. Please go ahead.

Hey, guys good afternoon.

Was wondering if there is anything changing on the labor front.

Hi, there one from more demand obviously as you open more facilities in the distribution space and to just getting people out to work given the environment right now.

Yes. This is Steve.

It continues to be if not the the number one concern of our customers. It's certainly in the top two.

If they're not complaining about how much read this.

The the lack of labor is a problem, we do we do labor studies.

On all of our land.

Land acquisition opportunities that we look at as well as any big vacancies.

It's sort of a.

And insurance policy for us on the front end that labor that there is enough labor, there or what we'd like to do more.

Most of our customers ask for it in the very first showing so.

That continues to be a problem you know I think the thought was that may alleviate some with what we saw with the unemployment numbers, but.

I don't think that necessarily affected what you'd call the essential businesses as that opened during the pandemic. So continue to be a real problem for us and for our customers I should say.

Thanks, Nick just going back to the conversation or whether it be on Amazon or any of your other well leased assets.

Is there any desire to hold on to the assets, whether it be in a JV structure or.

Somehow hold onto them in a portfolio format or sell them in a portfolio for that.

Manny, yes, there would be.

We look at each individual asset and sort of think about how it fits long term into our overall strategy and so.

You're going to see some outright sales you're going to see some that are.

Long term holds.

Force.

For various reasons and then we may potentially entertain a joint venture structure on some of them at some point in the future.

Great that's it for me thanks.

Yes.

Once again, if you do have a question or comment press one zero.

Our next question is from the line of Dave Rodgers with Baird.

Eric Please go ahead.

Yeah, Hey, Mark just a quick follow up on the straight line rent reversal you guys took a big write down in the first quarter. You said you reversed about a half a million of that this quarter I guess, one what triggered that and then to would we potentially see more of that based on whatever happened. This quarter that gave you the confidence to bring that back on the balance sheet, Let me know thanks.

Sure Dave will your second answer is I hope so.

We would love to get all that back I'm not prepared to do that right now I would just say there was no. It was not like there is any one big tenant or anything like that to cause reversal or continuing to look at our total portfolio and slice and dice. It a bunch of different ways I would say that in short the general reason that we reversed a 500000.

Which is collection experience I mean were seven months through this thing and we're just a whole lot better off today than where we thought we were going to be seven months ago more.

We're not through it far enough for me to even entertain reversing the rest of that right now, but you know this time next year hopefully we're talking about the ability to do that but time will tell.

Okay. Thank you.

Yes.

And we have no further questions at the moment.

Thanks, Josh I'd like to thank everyone for joining the call today.

Look forward to engaging with many of you over the next few months such as at the Navy Conference just three weeks operator, you may disconnect the line.

That does conclude our conference for today. Thank you for your participation and for using 80 teleconference. You may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty third quarter earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session instructions to be given at that time.

Should require any assistance lots of these calls please first star then zero and as a reminder, this conference is being recorded.

I will now turn the conference over to your host Ron Hubbard. Please go ahead.

Thank you Josh good afternoon, everyone and welcome to our third quarter earnings call.

Joining me today are Jim Connor, Chairman and CEO.

Janine CFO Steve Center.

Operating officer, and Nick Anthony Chief Investment Officer.

Before we make our prepared remarks.

Mind, you that certain statements made during this conference call any forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations.

These risks and other factors could adversely affect our business and future results.

For more information about those risk factors what are free to our 10-K or 10-Q that we have on file with the FCC and the company's other S. T SEC filings.

All forward looking statements speak only as of today October 29, 2020, and we assume no obligation to update or revise any forward looking statements.

A reconciliation to GAAP.

The non-GAAP financial measures have been provided in this call is included in our earnings release.

Our earnings release and supplemental package were distributed last night after the market close.

You did not receive a copy these documents are available in the Investor Relations section of our website at Duke Realty Dot Com you can also find our earnings release supplemental package as you see reports and an audio webcast of this call in the IR section of our website as well now for our prepared statement I will turn it over to Jim Connor.

Thanks, Ron and good afternoon, everyone first of all I Hope you and all of your families are healthy and safe as we all endeavor to get through this pandemic.

We had a great quarter and the outlook for our business is very bright to.

Demand for our state of the art logistics space continues to remain resilient amidst the volatility volatile economic environment.

Even recovery that's under way.

The consumer remains relatively healthy going to spending front with advanced August and September retail sales numbers up four and 6% year over year, respectively.

Copper sales were up over 40% in Q2 and estimates for full year growth 2020 or north of 30%.

Online sales activity remains robust with ecommerce penetration rate as a percentage of total retail sales rising six seven percentage points. So far in 2020 and expected to maintain at that penetration rate going forward.

[noise] numerous cargo transportation indices have also turned positive recently with rail cargo and truck tonnage both up about 5% year over year and now only slightly below peak levels.

Also the last two months of inbound of west or West coast container traffic has been up 11% to 14% each.

Each of the last two months all good indicators for the holiday season, and perhaps the inventory restocking themes, we've been talking about.

Nationwide real estate fundamentals for the quarter also ended up relatively strong given the surge in leasing primarily from E commerce or omni channel oriented firms as well as third party logistics firms. The result was the 47th straight quarter of net absorption. Despite many forecasts predicting the opposite.

Even more encouraging has been the resiliency and performance of our portfolio.

Third quarter, we achieved 32% rent growth in rental rates on a GAAP basis, and 17% on a cash basis.

We started four development projects totaling $261 million with solid value creation margins.

We have a strong pipeline of build to suit prospects, which in total is back above pre covert levels.

We signed 7.3 million square feet of leases, which contributed to a 30 basis point increase in total portfolio occupancy to 95.6% leasing.

Leasing was fairly broad based across industries with about 30% of untidy E Commerce.

At our monthly rent collections remains very strong at 99.9% for the quarter, including executed deferral agreements.

The end result is our year to date performance and full year expectations now exceed our beginning of the year expectations based on these results at our optimism for the balance of the year, we have raised the dividend and revised our guidance metrics Mark will go over these changes in detail momentarily now let me turn it over to Steve to cover our real estate operations in more detail.

Thanks, Jim.

In the third quarter. The U.S demand was 50 million to 77 million square feet and delivery for deliveries were 68 million square feet. This resulted in a flat vacancy rate from the previous quarter of 4.7%.

For the full year the major research firms project deliveries in the mid 200 million square foot range and demand to be 160 to 170 million square feet.

Given this outlook, we expect the high four to maybe 5% vacancy rate nationally.

On the rent side, yes.

Maybe a nationwide rent growth for this year to be in the mid single digit range for.

For next year early projections for demand and deliveries remain in the 250 million square foot range.

Historically high pre leasing estimate those deliveries.

Very well for the market to remain in balance.

As I noted on our last call and for recent CBRN JLL forecasts.

Intermediate and long term demand situation is very favorable for our sector.

We had an excellent quarter on the demand front with total leasing volume as Jim mentioned of 7.3 million square feet for our portfolio.

Our team did a great job of pushing rents with rental rate growth on new leases, 32% on a net effective basis, 17% on a cash basis as.

As you saw from our press release last night or lease renewal rate of 46% or 67% when including Backfills was lower than historical levels part.

Part of the story here is a one just the sheer volume of leasing was considerably lower than average and to our high occupancy levels and strong rent collections, we're continuing to aggressively push rents. So that also has some impact on the number one.

One of the more notable leases signed this quarter was a 1.1 billion square foot new lease for 100% of our speculative project under construction in the inland Empire, California.

Facility is not expected to go into service until the second quarter of 2021.

A great example of our team's success in leasing speculative developments well ahead of our underwriting.

As we noted on our last call as referenced by CVR any research there continues to be a post pandemic trend to larger lease sizes, and our own and our own portfolio. During the pandemic, we realized an increase in the average leases transacted by about 38%.

As we have emphasized before we believe the size and term of our transactions.

Our modern portfolio features and the credit profile of our tenants represents an 11 element of differentiation as stability in terms of our portfolio cash flow and speaking of cash flow I'll give you an update on rent collections. As most of you are aware and are numerous sell side research reports Weve reported some of the very best collection rates and the entire arena.

Industry since the onset of the pandemic.

Our monthly collections of trending better every month since the start of the pandemic and.

Amounts due under deferral agreements have been fully collected.

Some tenets of even repaying their deferred revenue ahead of schedule to avoid interest charges.

For the third quarter and including the month of October as well, our overall collections have averaged 99.93%, including the execute a deferral agreements.

On the development front as we noted on our late July earnings call and the demand the demand for newly developed logistic space was coming back strong and that we plan to commence new projects very soon during the third quarter, we started four new projects totaling $261 million in costs.

That were 28%, 28% pre leased on average two of the starts were speculative projects totaling 1.4 million square feet, and southern California, and Seattle markets. We also started to 220000 square foot project in Miami that a 72% pre lease.

The fourth development was a build to suit project totaling 415000 square feet and eastern Pennsylvania from Reckitt Benckiser Health. This is our second build to suit project for Reckitt.

There is a global manufacturer lysol wipes and other health care fraud products in summary of the third quarter was a great reflection of the health of logistics market and the strength of our portfolio.

Ill turn the call over to the next discuss the acquisition.

Thanks, Steve I acquisitions, we continue to be strategic and proactive had a lot of good investment activity during the third quarter. We closed on four transactions to acquiring total five to sell we sell these totaling 680000 square feet.

Total cost of $112 million.

The assets are all located in coastal tier one markets.

Facilities in Northern California.

Not in the Seattle market and one in northern New Jersey.

We are working on three of the four transactions pre Kobe and were able to transact and slightly lower purchase price discounts that are not available in the market today.

All these transactions have certain attractive long term return characteristics such as below market rents.

Cash flow from redevelopment and or were lightly marketed.

Overall, we believe we acquired these assets more replacement cost Unlevered IR, our expectations in a low 7% range.

This quarter is Austin exam power acquisition opportunities can be lumpy quarter to quarter as well as an example that we are mainly focused on single asset transactions with the potential to capture a yield premium.

On the disposition side, we closed on the sale and a 280000 square foot building in Indianapolis for 18.5 million at a 5% cap rate.

As I implied by our 20 as implied by our 2020 disposition guidance of $300 million mid point, we have a number of disposition transaction expected to close in the fourth quarter.

These deals are on the final mortgage stages or under agreement.

Some of these assets as well as future dispositions include Amazon.

We manage our overall exposure given the significant amount of business, we continue to transact on with this key customer.

I will turn it over to Mark discuss our financial results and guidance update.

Thanks, Nick good afternoon, everyone.

Core FFO for the quarter was 40 cents per diluted share compared to 38 cents per diluted share in the second quarter of 2020, and 37 cents per share in the third quarter of 2019, the increased in core FFO in the third quarter of 2020 compared to the second quarter was driven by higher occupancy and.

Rental rate growth.

As a result of favorable collections history and updated credit reviews, we reversed approximately $486000 of reserves on straight line receivables during the quarter or recording nearly no cash bad debt expense.

Reported FFO as defined by ne read 39 cents per diluted share for the third quarter of 2020.

Compared to 33 cents per diluted share in the second quarter of 2020, the increase in the third quarter as a result of losses on debt extinguishment recognized during the second quarter as well as the same factors that drove the increase to core FFO FFO as defined by ne rate was 37 cents per diluted share in the third quarter of last year.

Hey, AFFO totaled $135 million for the third quarter of 2020 compared to $120 million for the comparable period of 2019.

This increase in AFFO is due to the earnings growth that drove the increase in core FFO and overall continued improvements and leasing economics same property NOI growth on a cash basis for the three and nine months ended September Thirtyth 2020, compared to the same periods in 2019 was 5.0% and five.

25%, respectively same property NOI growth for the quarter was driven by increased occupancy rent growth and the expiration of some free rent periods same property NOI growth on a GAAP basis was 3.6% from the third quarter and 2.7% on a year to date basis.

From a capital standpoint, our leverage metrics remain very conservative debt to EBITDA on a trailing 12 month basis.

Five times consistent with the midpoint of our guidance our current quarter annualized basis debt to EBITDA was 4.6 times.

Hold with our substantial leverage neutral funding capacity, we have multiple levers to pull for raising new growth capital at very attractive pricing with the current state of the capital markets instead of the investment sales market.

Remind everyone that the capital deployed into developments set a strong pre leasing level for example of the 3 million square feet of projects being delivered in the next two quarters. They are in aggregate, 93% Preleased, let's say mid 5% expected stabilized yield and thus are immediately accretive to earnings also our near term note.

All the prospects are heavily tilted towards highly pre leased and build to suit projects.

I would now like to address the changes to our 2020 guidance, we've made which are based on our better than expected third quarter results and a continuation of our optimistic outlook for demand and tenant credit worthiness.

First we've increased our guidance for core FFO to a range of $1.50 to $1.54 per diluted share from the previous range of $1.48 to $1.54 per diluted share, which equates to a one cents per share increase.

The mid point compared to our last guidance update in July.

The increased guidance for core FFO is driven by our strong leasing results, thus far as well as a lower estimate of bad debt expense for the remainder of the year page 16 of our supplemental information details our bad debt expense estimates.

For similar reasons to core FFO. We have also increased our guidance for Narita AFFO to range from $1.38 to $1.44 per diluted share from the previous range of $1.35 to $1.43 per share.

Also driven by the same factors as our updated guidance for core FFO, we've increased our guidance for the gross and adjusted funds from operations on a share adjusted basis to range between 4.6% and 7.7%.

Compared to the previous range of 3.1% to 7.7%.

Same property NOI growth on a cash basis, we've increased our guidance to a range of 4.7% to 5.1% from the previous range of 3.5% to 4.5%. This increase in guidance as a result of our leasing progress to date continued rental rate growth and lower expectations for bad debts for the remainder of the year.

Based on our continued progress and leasing up or cycle developments as well as our solid pipeline build to suit prospects. We've increased guidance for 2020 development starts our revised guidance of between $650 million and $850 million compared to the previous range of $350 million to $550 million.

Also as Nicks team has been successful at finding some one off acquisitions in coastal tier one markets, we've increased our guidance for acquisitions.

225 million to $325 million compared to the previous range of $50 million to $250 million.

And a couple more.

The other components our guidance based on our more optimistic outlook as detailed in a range of estimates season, including our supplemental information on our website now I will turn it back over to Jim for a few closing remarks.

Thanks Mark.

Our quarterly results were strong highlighted by solid leasing, particularly in the speculative development pipeline the achievement of 32% rental rate growth and a rebound in our development starts.

While we are mindful of continuing macro economic and political risks are resilient performance. The last two quarters and the continuing strong demand themes should provide opportunities for us to continue to drive earnings for US. This confidence was reflected in last night's announcement that our board of directors has approved the raised the quarterly dividend by two cents.

There are over 8.5% over the previous dividend rate.

With that we'll now open up the lines to the audience I would ask that participants keep the dialogue to one question or perhaps two short questions and you of course are welcome to get back into queue.

Josh you May open up the lines that we are ready to take our first question.

Well, ladies and gentlemen, if you would like to ask a question press. One then zero on your telephone keypad.

And our first question is from the line of.

Eric Frankel with Green Street. Please go ahead.

Yes.

Thank you.

Just a couple of short questions well first just regarding your leasing activity. This quarter, obviously it had some growth in the leasing volume.

You just commented on the lease term that does seem to be a little bit shorter than usual, especially for the renewals.

Yes, Eric this is Steve.

I think I think overall activity for the quarter anytime were over 7 million feet in our portfolio, we feel pretty good about it.

And our occupancy levels are fairly high as well so.

And then in terms of the shorter term.

Theres not a lot to read into there I think we're.

So year to date, we are we're on par with where we were 19 the quarter was a little shorter and a little over three years, but that's just a couple of a couple of transaction sample size.

Okay.

Thanks, and just another quick follow up just regarding your capital allocation activity.

Hey, how are you thinking now about about acquisitions and dispositions going forward here, obviously, you are able to find.

A couple of pre cobot deal on the brand across the finish line.

And we do plan to kind of match still kind of fun to match fund acquisitions with dispositions are they going to be more programmatic. We think over the next couple of quarter next year.

Hi, Erika snack yes.

Yes, I would say generally we are going to match fund we continue to be.

Very opportunistic on the acquisition side and very focused geographically on the coastal tier ones, but I think you will see the acquisition just as your volumes kind of be equal to each other.

Okay. Thanks, guys.

Our next question is from the line of.

Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks, good afternoon.

Nick just to follow up on acquisition strategy.

Talk about whether you are looking for core buildings in those markets that you wanted to increased allocation to which I kind of looked like was with part of the drive behind some of the acquisitions this quarter.

Or is the focus going to be more on deals with vacancy upcoming rural any other value add component and how much of a differential if any is there in pricing for core versus value add at this point.

Well Blake first of all I would tell you that most of the acquisitions are focused on lease product.

Because most of the vacancy that we take on we do on the development side.

Basically we are teaming up with our development teams to find.

Assets that are below market, we can buy below replacement cost or theres happens to be a redevelopment play going forward.

So thats generally what we're focused on we'd love to buy some corp. Some some class a newly developed assets and very infill markets.

But the pricing on those have been pretty aggressive recently, most notably there was a deal in southern California, the trade into sub three and a half cap rate. So we are still being prudent with our capital and just trying to find assets assets that aren't quite.

As fully marketed as some of the others.

Great Thats helpful.

Just a follow up on that cold storage is seeing a lot of positive momentum from the pandemic you guys bought a cold storage facility in the second quarter last year, but I'm not sure you've done anymore. Since then can.

Can you just talk about whether you guys would consider expanding that part of the business and I guess your appetite for cold storage going forward.

Well, we like the product we like the asset we purchased we have pursued and probably we'll do some old stories on the development side.

There is not a lot of opportunities, though I would tell you. So it's never going to be a large part of our business. As we said before we are not intending to be operators of that that product type. So we're really looking for asset that you can actually lease back to other operators.

And frankly, it's tougher to find those assets and the coast in tier one markets.

Got it thanks.

Our next question is from the line of Jamie Feldman with Bank of America. Please go ahead.

Thank you.

I appreciate your color on the expected supply next year I think you said 250 million square feet, which would be about the same as this year.

How do you think about your.

Kelvin pipeline do you think it would be pretty similar as well as you're kind of starting to pencil out.

It's possible for that for the next 12 months.

Yes, Jimmy I'll I'll, let Steve to add some color.

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Clearly, we're feeling much more comfortable about the development business in 21 than we were even just a quarter ago are you know the performance of our portfolio has allowed us to start building speculative again and Thats always been.

Roughly 40% of our development pipeline so.

If we can continue to do speculative development I think you will see us.

Return to historical levels that you saw us operate in 17, 18, and 19 I know Steve you want to you the color, yes, Jamie the only other thing I would add is you've heard us talk in the past about our build to suit pipeline and the.

The attention we pay to that in terms of the confidence of our customers and what that pipeline looks like I'll tell you that pipeline today is as high as it's been in.

In the cycle in terms of active prospects, we're looking at so we feel good about it.

We feel good about where the directions that in for development for us.

Yeah, you I guess your comment about even your fourth quarter starts sound like they'd be pretty heavily weighted towards build to suit I mean do you think that.

You will yield continue on with that pipeline and then.

Get back to a 40%.

You kind of 60% spec, meaning like even incremental over whats in the pipeline or youre kind of keep the same size.

To be more build to suit for a while longer.

Well I think the answer lies somewhere between I think you know the message Steve is trying to convey is the build to suit pipelines as strong as it's been in the last four or five years. So obviously, we see a lot of.

Significant opportunity there I think you can plan.

On us continuing spec.

At a slightly more elevated rate that we are this quarter again as long as the market will bear our our portfolio performed well and the markets continue to perform well. So we're not in a hurry to ramp that back up it's not like we're trying to achieve a certain speed.

Specific number or target.

We're very comfortable with the revised guidance that we gave given everything that we see in the marketplace and I think next year that you know as long as the trend holds true again should should recover nicely.

Okay, great. Thank you.

Our next question is from the line of Dave Rodgers with Baird. Please go ahead.

Yeah, good afternoon guys.

Nick maybe just another one on investment sales, what what do you see kind of going into the end of the year is activity kind of coming back to normal for the fourth quarter in terms of investment sales transactions, just nationally and your ability to participate in those and your thoughts around cap rates heading into the end of the year and into early 2021.

Yeah, Dave it's going to be very active in the fourth quarter for us and everyone else.

Everybody took a pause.

Earlier in the year and now everybody's racing to the finish line to get a bunch of deals close by year end.

As I've mentioned before cap rate clearly have compressed we're seeing trades now.

Proving that out and I would say, it's pretty broad based.

We've seen sub three and a half in southern California, four and a half in Atlanta, and we've seen some five while below sub five in Indianapolis.

It's a good mix a lot of them are Amazon transactions, but there is a mix of plenty of others out there to prevent those cap rates have compressed.

But there is a lot of demand from investors either investors getting back into industrial rotating out of other product types and obviously the interest rates are off also fueling that activity as well.

Okay. That's helpful. And then maybe just to stick with the development theme.

Can you talk about construction cost land cost is what you're seeing out there and then in terms of kind of where you think you can achieve in terms of development margin on the projects that you are starting.

Here in the second half of the year.

Sure David Steve.

I think land land prices have continued to be.

Sticky if not increasing right.

Certainly in the markets, we want to invest in.

Construction cost I'd say or.

Historically moderating in terms of their increases probably in the low single digits on an annual basis in terms of cost.

And then margins on the development side, we've been pretty consistent with with our margins I think we've been north of 30% on our margins.

As Jim indicated mix.

Mixing in the build to suits, we like the risk adjusted returns on those deals and we've been pretty consistent in our portfolio for use at margins that are that are 30% are better.

All right great. Thanks.

Our next question is from our line of Omotayo Okusanya with.

Lisa Please go ahead.

Hi.

Good afternoon, everyone and good.

Got rid of that could you talk a little bit about what you would expect those developments but to be over the next.

Six to nine months.

Sure I would tell you we liked the coastal tier one markets others.

Southern California, Northern California, Seattle, New Jersey.

Amy there.

Theres Theres, a handful of other sub markets.

In some of the other cities, we operate them that.

Where we've got good positions and we think the opportunities right, we pull the trigger on that but certain.

Certainly those five markets from a broad perspective.

Okay, Great and if I did the math one quick follow up.

Same store NOI, 5.5% year to date, when we give guidance for nine so it implies a deceleration in fourth Q 20 could you talk a little bit about that.

Sure.

There's a few moving pieces, there and I think part of it is just timing from quarter to quarter.

A couple of those moving pieces, if you look at our end.

In the third quarter of 20 compared to the third quarter of 19 and really the whole first nine months were up about 60 basis points in occupancy. So we've had a big uplift in.

Same property analyzed because of occupancy, but then when we get out to the fourth quarter, we had a really high occupancy comp in the fourth quarter last year. So, we're really projecting occupancy and be pretty flat quarter over quarter in the fourth quarter. So thats part of the reason there another one that's really.

Impacting the third quarter positively and negatively in the fourth quarter is free rent burn off.

We had a little bit of free rent burn off in the third quarter of this year compared to last year. So that was an uplift not signaling of a little bit.

We funded the other way in the fourth quarter, we have a little bit of extra free rent in the fourth quarter. This year compared to fourth quarter last year. So it's a little bit of a negative so I just add a little bit of timing and in the final part final reason as bad debt expense.

I mentioned earlier, we had no bad debt expense in the third quarter of this year.

We have in our guidance about $500000 of bad debt expense in the fourth quarter.

Hopefully that doesn't happen, but thats baked in the guidance. So a lot of little moving pieces that no. One individually is a big big factor most of it.

Great. Thank you.

Our next question is from the line of Brent did.

Yes. Please go ahead.

Hi, Thanks.

I heard your comment on improved rail and ship volume. So could you just talk about how well you think supply chains are prepared for an acceleration in the pandemic. This fall and winter just assuming that pace acceleration keeps up for a little bit.

Yes, I can I can give you some high level and Steve can add some color as well there's a there's a couple of components I mentioned in my remarks, you know the.

Inventory restocking and obviously.

With that and with the amount of.

Good that had moved thus far this year theres, a tremendous amount of restocking of inventory.

Then second to that is the concept that we've all been talking about for the last couple of quarters.

Which is the safety stock to or increased levels of inventory in the us and I think both of those are driving.

What we're seeing in terms of demand that would be supported by the increased transportation numbers that we're seeing.

Most more recently so Steve you can add some color to that yes, I think the only thing I would add is where we are is engaged with our customers today as we probably ever have been given what what all of us have gone through.

You know, there's there's a lot of talk out there about supply chain resiliency about where products are coming from you know theres theres articles everyday about delivery times from from E Commerce and fulfillment centers Theres.

Theres Theres up there is a lot being done on the on the restocking side of things if you look at.

Inventory to sales and the and the retail category Thats as low as its been.

Maybe ever in the history of about 1.2.

Time, so theres a lot of talk going on and I think we'll continue to see this drive volume in our sector for for the near future.

Great. Thanks, and then just one quick one on tenant concentration.

Both regards to Amazon, but just more broadly how you're thinking about that as the business moves towards greater penetration of ecommerce.

Well, if you asked me today I like Amazon.

Given everything that's going on in the world.

We're pretty comfortable having an a rated.

Company as a client assets.

Growing as rapidly as they are but all kidding aside we recognize that concentration.

We have been looking at a number of alternatives.

We have mentioned in the past selling.

Some Amazon in individual assets as we have historically done.

Over the last few years and so I think you'll continue to see us.

Focus on managing at the corporate level through.

Through those types of vehicles.

Okay, great. Thanks, guys.

Our next question is from the line of Rich Anderson with SMBC. Please go ahead.

Thanks, Good afternoon, everyone.

Rich so.

I asked this question to one of your peers last.

Last week I think but.

What do you make of the idea that.

Post Cove, it things actually start to slow down for your space you're kind of.

Fast tracking E commerce here, it's like shot gunning, a beer instead of shipping it quietly nicely.

And.

And a lot of a lot of the good stuff is coming through like a fire hose at the moment.

Is there a chance that this.

Beyond the in this environment, which we're all hoping for quickly could actually slow your business down on the other side of this.

Rich I'll start out.

There is always there is always a risk, but I think one of the things that comes out of situations. Like this is these trends never completely reverse themselves. So I don't think people are going to go back to.

[music].

Not doing any online grocery shopping or going back to pre pandemic levels.

I think ecommerce companies feel very comfortable that the level of conversion that they've had in the last couple of quarters.

They think they can keep the vast majority of those of those clients and the other thing I would point to is let's go back to pre co bid we've been on a pretty good run lot of that obviously driven by strong and growing economy, but a lot of that is also supply chain revitalise.

We should you know existing retailers and consumer products company, having to invest heavily in their supply chain to compete with the ecommerce companies, we've talked before about the need to be able to get product to the customer inside of 48 hours of your supply chain doesn't allow for that that's a problem.

We've talked in the last.

Last couple of quarters about re shoring or near shoring give.

Giving given some of the issues with.

With China that don't appear to be going to go away anytime soon.

A lot of our customers have been seeking alternative sources.

And trying to get product.

Closer to the U.S., if not within the us to alleviate some of those issues. So I think the combination of all of those things would tell you that we're in a pretty good spot going forward. There is always the risk that you that you mentioned, but I really don't think thats very significant.

I think we'll continue to go in the direction we're going.

Okay, and then one of the.

Problems, if the problem I don't know about your business is hard sometimes to know exactly how much Carmen ecommerce is playing a role in your tenure.

And your leasing activity in your tenants and all that sort of stuff.

Does this environment sort of sort of excavate out some in some observations about how much ecommerce is really playing a role in do you actually become smarter about your tenants in the aftermath of all this because of what has happened.

Well I would answer your question this way it might.

The answer is yes E commerce is probably a bigger driver than people given credit for first you have the Amazons and the true ecommerce companies that are out there are consuming a large amount of space. Nobody is denying that we talked about ecommerce being roughly 30% of our volume last quarter. That's that's absolutely true the other.

Opponent is you've got.

Our omni channel customers that are doing distribution to other retail clients, they're doing their own online sales, maybe they're doing distribution to their own retail stores.

That component again being driven by E commerce and changes.

Is forcing those companies to make investments and then the other is the traditional retailers.

Whether you're talking about target or Walmart or home depot or lowes or any of these companies are investing heavily in their supply chain to match what E. Commerce can do so I think aside from pure ecommerce consumption of our space of the sector, it's driving a lot of additional consumption of our space sector.

Okay, great. Thanks very much.

[music].

Our next question is from the line of John Kim with BMO. Please go ahead.

Thanks, Good afternoon.

Increased from ecommerce market share everything that you just mentioned was up from 20% last quarter and Im just wondering if you expect that percentage to continue to increase.

And then also what other industries do you see increasing the man and lastly, what industry PC waning demand.

Sure I think I think we will see ecommerce continued to be.

A big chunk of the activity, we're doing and that May vary and as Jim said between retail and Omnichannel and Threepl that are doing work with E. Commerce, sometimes it is hard to decipher how deep that goes but clearly as the largest driver in our business right now.

Outside of that I mentioned Threepl is whether that's ecommerce related retail related suppliers.

Manufacturing Assembly, we see that being a good driver of space consumer goods, Mick I mentioned.

Our build to suit with reckitt been keezer.

Yes, thats somewhat consumer good healthcare related and then the final one which someone mentioned earlier in a comment or question was the food and beverage side, not just cold storage, but.

Dry goods as well food and beverage continues to be a very active segment for for us and the sector as a whole.

On the acquisition opportunities that you guys mentioned focused on tier one markets can you share any other characteristics.

What you're looking at the target model by written.

Buck stable asset versus what the market opportunity.

So for.

Yes, I'll give you. This is Nick I'll give you a little bit of color on this quarter's activity, which I think will be similar to what we see going forward.

For example, we transacted on asset Northern California, where we did a short term sale lease back that we expect the read about that 20% margins.

And in the future.

Our New Jersey, we found an asset that was leased well way below market about 50, 60% below market.

It does it has uncovered by a long term lease, but we were buying it well below land cost. So we will be able to get a good return from it with good bumps then hopefully that will be a redevelopment at some point in future potentially.

We also bought transaction in Oakland that has good access the I 80 in frontage to it as well those.

Those assets are well positioned slightly below market below replacement cost and we'll probably hold and lease those on a long term basis thats kind of what we're looking for like I said earlier, we havent taken on a lot of vacancy risk on our acquisitions as we get the bridge transaction largely because most of that is.

We take that risk on the downside.

That's great color. Thanks.

Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please go ahead.

Hi, everyone. Good afternoon.

Thank you introduced disclosures regarding short term leasing in early renewals.

What are the three clear it looks like the year to date short term leasing is already higher than full year 2019 in square footage and that early renewals are also significantly then.

Thanks, Tim level, just wondering what's driving these increases.

Yes.

[music].

Kayla Smart I'll cover the early renewals and maybe Steve can talk about the lease term.

The main driver of the early renewals were to basically extensive lease terms on some assets that were looking to transact on from a disposition perspective. So these are assets it'll probably close.

Under yet this year or early next year, and it's really just a lot to tenant into longer term leases to increase our value on the disposition side. So thats really the driver of the early renewals and then I'll, let Steve comment on the lease terms, yes at least on some of the short term leasing I think it was done in the second third quarter.

Where there was a little bit more uncertainty in the market early early late in the second quarter and early in the third quarter.

I think you'll see that taper off again some of those are larger transactions that line of Holden over an extra month or two but.

But I wouldn't I wouldn't read anything into it.

From a from an overall macro trend for us or the market.

Got it and then.

I think the straight forward one in terms of bad debt.

I know the day, three key with lower than expected and that 2020 guidance down by 500000 of bad debt in Fourq. So is it that there were specific tenants that you had been watching and if so then I'm wondering kind of what's the outlook for them are they added the white or with it yet thank you.

You had kind of an amount to be conservative and you did not end up.

You know I would say that there's really nothing new out there from.

From the troubles me.

In fact, I continue to be surprised on some of the folks in Washington to get caught up we've even had tenants that we gave deferrals to that are paying them off early to avoid interest charges. So I continue to be pleasantly surprised overall from a collection standpoint, the ones that were watching that made up the reach that made up the majority of the reserve.

We took and are sort of baked in that potential fourth quarter or the industries that are really impacted by coal.

You think like travel leisure.

Entertainment hospitality of the planning couple.

Companies like that to truly are our.

Really suffered from cold it.

They continue to a lot of them most of them continue to pay us, but they are the ones that we kind of watch the most it's not like we have a lot of exposure to those industries, but that's really what's been on our watch list and continues to be there.

Got it okay. Thank the only thing I would add to that as most all those in addition to the.

Industries, they're in June the tip.

Typically are on the smaller tenant side as well so they just worry me a little bit from their overall.

Where result to withstand if there's another shutdown or something like that but most of them actually continue to to be current on their rents.

Thank you.

Yep.

Our next question is from the line of high bin Kim with two it. Please go ahead.

Thanks.

Hey, guys.

So I'm looking at your development pipeline.

For the private banking delivered over the past couple of years.

The yields have ranged from that kicks in the half to 7%.

And the current projects that are under construction that yield is 6% now.

It's obviously a mix issue as you do in a lot more in California, so the yields by nature should be lower.

But then they get your landing what you've been eating into and that you have to reload that land bank with more market price plan I'm just curious about what the next couple of rapid development, what kind of yields we should expect that if there should be further compression that we should just be thinking about.

Kevin Let me start on the land piece, you I mean, you're obviously right reloading a market level pricing the dry.

Drive costs up, but what I would tell you is in the markets, where we have been doing in the.

The on the coastal markets, where we've been doing land, it's all that market because as soon as we buy that land it really goes right into production.

As we can get it entitled So it's not like.

Our yields in the past had been inflated based on lower land prices. If you will we always the yields in those markets are always with land prices have Mark and then I'll, let Nick or Steve add to that.

Clearly that the.

Change in yield this is based on our geography the mix of the assets, we obviously were doing.

More development in the other major markets at slightly higher yields and as we grab data do more coastal tier one development thats whats driven down the yields there.

We continue to see good margins, but land is getting expensive.

It's something that we deal with every day in our business and we'll continue to manage going forward.

Okay. Thank you.

Okay.

Our next question is from the line of Mike.

Mueller with JP Morgan. Please go ahead.

Yes, Hi, just wondering have you been seeing anything different in terms of development lease up times compared to prior years, maybe maybe ignoring what happened during the lock down, but just thinking about now and kind of going forward.

No. This is Steve I will tell you we as a standard practice we underwrite.

One year lease up timeframe on all of our new developments that are that are spec.

We've we've averaged we beat that.

By about three or four months on average.

So I would tell you we continue to see good pre leasing activity in our portfolio.

We were just talking today about about southern California, and I think we've done 10 projects in.

In or on the inland Empire 10 spec buildings and we've pre leased nine of those before.

Before the end of construction, so I think we see that as it gets.

Sign for the health of our markets.

Okay, great that was it.

Thank you.

Our next question is from the line of Eric Frankel with Green Street. Please go ahead.

Thank you I just wanted to get back we see question did you don't mind first I should have asked.

Earlier, but your early lease early renewal early renewal with excuse me that was affecting your cash rent growth was it.

It is not Eric I mean, we don't count. Those these are early renewals are deals that are renewed two years before there.

Up so even if we were to go down it would be misleading because you wouldn't get to that pop for two more years and like I mentioned on an earlier question well actually never get the growth anyway on those because they were done in connection with assets were going to sell.

So they're not as confident as Shoguns yup, okay, great good to know.

Then related to that on the cash rent growth figure itself.

Can you provide a rough geographic mix, that's kind of where that shaking out maybe where there are few more coastal market leases that roll that during the quarter and then maybe that Navigant is also trend. It's got them how rents are generate trending I know you've been you're thinking that coastal market rents or are you going to continue to grow but maybe you can talk about what you've seen over the last couple of.

Orders, yes.

Eric I'll cover whats in the current numbers and Steve can touch on what were seeing act.

Actually the did leases, making up our growth really for this quarter. It really for the year is really.

Pretty indicative of our overall portfolio. So its not heavily driven by any one market. So for example, if our coastal market exposures, 35% thats about the percentage of deals that said that from the coastal non coastal Conversely, so.

Yes, the only thing I would say is you got to remember that a lot of these non coastal markets, while maybe the year over year rent growth has not been quite as.

Dramatic as the coastal markets a lot of those leases we have an older vintage older vintage leases. So our mark to market on those is still very healthy and then I'll, let Steve talk about what we're seeing and yes, I think consistent with what Mark said.

Eric.

I've seen we've seen better rent growth and the high barrier costal markets.

Seattle, New Jersey, Southern California in particular have been have been very strong markets for us.

In terms of the other markets.

But mark covered again, we've got and we've got pretty good growth probably the one that's been a little challenging for us has been Houston.

That'd be the one market I'd point out where where that's been a bit of an outlier to the other way.

Got you. Thanks, thanks for the color.

Our next question is from the line of Jamie Feldman with Bank of America. Please go ahead.

Hi, I guess, just a similar question not.

Not rents, though by just cap rates can you talk about where are you seeing the most cap rate compression.

Across the market.

Jamie it's been pretty widespread I would tell you.

Obviously, we've seen I would say, it's probably been 25 to 40 bips.

As you see more deals there is a lot of room or trades and then you actually see that trades, we're going a little more comps and how much it is compressing.

Like I said earlier, we saw a sub three and a half trade in.

Southern California, we've seen us up.

Four and a half in Atlanta, and then we have seen.

I think a four well having traded yet.

Trades is quite a bit lower than a five cap closer to four and a half on the east side of Indianapolis. So it's been pretty widespread obviously theres still.

Broad range not not every deals obviously that those are those are the record cap rates.

You're still seeing something higher depend on what it is and where it is and where the market rents are but it's pretty widespread.

And the 25 to 40 thats over what time period.

I would say from pre committed today.

Okay.

Alright, great. Thank you.

Our next question is from the line of Emmanuel.

Cushman with Citi. Please go ahead.

Hey, guys good afternoon.

Was wondering if there is anything changing on the labor front.

Either one from more demand probably fit as we open more facilities and the distribution space and to just getting people out to work given the environment right now.

Yes. This is Steve.

It continues to be if not the number one concern of our customers. It's certainly in the top two.

If they're not complaining about how much read this.

The the lack of labor as a problem, we do we do labor studies.

On all of our.

Land acquisition opportunities that we look at as well as any big vacancies.

It's sort of a.

And insurance policy for us on the front end that.

Later that there is enough labor, there or what we'd like to do.

Most of our customers ask for it in the very first showing so.

That continues to be a problem you know I think the thought was that may alleviate some with what we saw with the unemployment numbers, but.

I don't think that necessarily affected what you'd call the essential businesses as that opened during the pandemic. So.

Continues to be a real problem for us and for our customers I should say.

Thanks, Nick just going back to the conversation or whether it be on Amazon or any of your other well leased assets.

Is there any desire to hold on to the assets whether it be in a JV structure.

Somehow hold onto them in a portfolio format or sell them in a portfolio of format.

Manny, yes, there would be.

We look at each individual asset and sort of think about how it fits long term into our overall strategy and so.

You're going to see some outright sales you're going to see some that are.

Long term holds.

Force.

For various reasons and then we may potentially entertain a joint venture structure on some of them at some point in the future.

Great that's it for me thanks.

Yes.

Once again, if you do have a question or comment press one zero.

Our next question is from the line of Dave Rodgers with Baird.

David Please go ahead.

Yeah, Hey, Mark just a quick follow up on the straight line rent reversal you guys took a big write down in the first quarter. You said you were reversed about a half a million dollars of that this quarter I guess, one what triggered that and then to would we potentially see more of that based on whatever happened. This quarter that gave you the confidence to bring that back on the balance sheet, Let me know thanks.

Sure Dave will your second answer is I hope so.

We would love to get all that back I'm not prepared to do that right now I would just say there was no. It was not like there is any one big tenant or anything like that did cause reversal or continuing to look at our total portfolio and slice and dice. It a bunch of different ways I would say that in short the general reason that we reversed a 500000.

Which is collection experience I mean were seven months through this thing and we're just a whole lot better off today than where we thought we were going to be seven months ago.

We're not through it far enough for me to even entertain reversing the rest of that right now, but this time next year hopefully we're talking about the ability to do that but time will tell.

Okay. Thanks.

Yes.

And we have no further questions at the moment.

Thanks, Josh I would like to thank everyone for joining the call today.

Look forward to engaging with many of you over the next few months such as that that name Reponse. Just three weeks operator, you may disconnect the line.

That does conclude our conference for today. Thank you for your participation and for using ATP teleconference. You may now disconnect.