Q4 2020 Duke Realty Corp Earnings Call
Yeah.
[music].
[noise], ladies and gentlemen, thank you for standing by and welcome to the Duke Realty Earnings Conference call. At this time, all participants are in listen only mode and they will have a question answer session and instructions will be given at that time, if you should recall.
The assistance during todays call. Please press Star then zero as a reminder, today's call is being recorded and actually the cost of your host Ron Hubbard. Please go ahead.
Thank you, Sean and good afternoon, everyone and welcome to our fourth quarter and year end 2020 and earnings call joining.
Joining me today are Jim Connor, Chairman and CEO, Mark the knee Chief Financial Officer.
Nick Anthony Chief Investment Officer, and Steve Schnur, Chief operating Officer Bill.
Before we make our prepared remarks, let me remind you that statements. We make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations.
For more information about those risk factors, we would refer you to our December 31, 2019, 10-K that we have on file with the SEC now.
Now for our prepared statement ill turn it over to Jim Connor.
Thanks, Rob and good afternoon, everyone.
I hope all of you joining us today as well as your families are safe and healthy.
Let me start by saying that 2020 was another outstanding year for Duke Realty.
Even amidst the global pandemic and of major U S recession, we exceeded all of our 2020 goals, including our original pre pandemic operating and financial guidance metrics.
We also capped off the year with fourth quarter leasing volume being the strongest quarter of the year and just after quarter and executed a significant debt transaction to bolster our balance sheet, which sets us up for a great start to 2021.
Let me recap the highlights of our outstanding year.
When the pandemic hit we engaged our business continuity plan to ensure the health of the safety of our employees our customers and our construction work site. This was executed extremely well and Im happy to resort cases of Duke Realty were very minimal.
We signed nearly 21 million square feet of leases.
We maintained the occupancy of our stabilized portfolio between 97% and 98% throughout the year and our total portfolio, which includes our underdevelopment pipeline ended the year at 96% leased the highest level we've ever achieved.
We renewed 70% of our leases for 83% when including immediate back fills and attained at 29% GAAP rent growth and 14% cash rent growth on second generation leases throughout the year.
We grew same property NOI on a cash basis of 5%, which included which exceeded our revised guidance expectations, we commenced $795 million and new developments that were 62% pre leased 67% of which were and coastal tier one markets.
And we placed $730 million of developments and service that are now 94% leased we completed $322 million of property dispositions and $411 million of property acquisitions and <unk>.
Raised $675 million of debt at an average.
At a weighted average term of 20 years and on average coupon of two 4%.
We increased our annual common dividend by nine 1% and finally, we've continued to run our company and the most responsible manner with our ESG culture and numerous numerous ESG achievements now let me turn it over to Steve Schnur to cover our operations and for the quarter and touch on some market fundamentals.
Thanks, Jim I'll first touch on overall market fundamentals, the fourth quarter demand was exceptional and the logistics sector with 104 million square feet of absorption, which was the highest on record.
Demand exceeded supply for the quarter by about 30 million square feet, which nudged national vacancy rates down to four 6%, which is still roughly about 200 basis points below of long term historical averages.
For the full year demand was 225 million square feet compared to a supply of number of 265 billion square feet.
Even when adjusting for the significant amount of activity, we saw from Amazon and this year. The full year 2020, net absorption was still 12% higher than 2019 per.
Per transactions larger than 100000 square feet E. Commerce users comprised 22% of total demand of three pls about 26% comparatively E commerce demand and our own portfolio represented about 20% of our total leasing square footage volume for the year.
This segment of the demand market users over 100000 square feet continues to be the most active subset to that and we signed 29 deals from the fourth quarter over 100000 square feet in our portfolio and.
Asking rental rates rose again in the fourth quarter up eight 3% over this time last year. This rate of growth is about 100 basis points higher than the five year historical average of seven 1%.
We see this trend continuing in 2021 with macro rent growth levels and the mid single digits.
And our own portfolio, we had our strongest quarter of the year with $9 7 million square feet of leases executed, which is our second highest quarter ever and our company's nearly 50 year history of.
The average transaction size of the 104000 square feet. In addition, the average lease term signed during the quarter was seven five years.
On the rent collection side, we averaged 99, 9% for the fourth quarter and 99, 9% for the full year arguably best in class and the entire REIT sector. These figures include include a very small amount of deferral agreements and credit enhancement collections as detailed in the supplemental package.
Looking forward, our overall tenant credit quality is very strong we do of a handful of tenants and industries, most acutely impacted by COVID-19, but our and financial difficulty, which mark will touch on in a moment as to the minor impact on our 2021 financial numbers we.
We do have a strong prospect list the backfill from most of these spaces. So the longer term impact from the situation, we believe will be positive.
At quarter, and our stabilized and service portfolio was 98, 1% the lease activity for the quarter combined with the strong fundamentals I touched on led to another great quarter of rent growth of 13% cash and 27% GAAP.
And we also had a very strong quarter and first generation leasing.
And our speculative developments under construction, we executed two significant leases and the quarter. The first was the 622000 square foot lease in northern New Jersey to a leading national home furnishings retailer looking to expanded supply chain network for inventory of redundancy often referred to of safety stock of <unk> referred to as increased inventory levels.
For them to take 100% of the facility and 100% of the space and that facility. The second notable lease transaction and the spec project was of 290000 square foot lease, we signed and the South based Submarket of Southern California.
This lease was a major two of major national beverage distributor to take of 100% of the space as well and it's important to note. Both of these buildings are still on our construction and not scheduled to be completed until the second and third quarters of this year.
Turning to development, we had a tremendous quarter of starts breaking ground on eight projects totaling $420 million and costs and 69% pre leased seven of these new developments, where part of our detailed press release that we issued on December 7th and then later in December we started on another project for about 146000 square.
Feet and the mid counties Submarket of Southern California and.
And total nearly 70% of our fourth quarter development starts were and coastal tier one markets and five of our eight projects, where redevelopments of existing land and site structures. Our development pipeline at year end totaled $1 $1 billion with 80% of this allocated the coastal tier one markets.
This is the larger pipeline that we had a year ago and the allocation of the coastal tier markets was also higher than a year ago.
The pipeline of 67% pre leased and we expect to generate margins and the 30% to 40% range.
Looking forward our prospect list for new starts and 2021 is very strong and our land balance at year end totaled $297 million with nearly 80% of this <unk>.
Allocated of coastal tier one markets setting us up very well for future growth.
Now I'll turn it over to Nick Anthony to cover acquisitions and dispositions for the quarter.
Thanks, Steve we had a very active quarter on both dispositions and acquisitions.
And with our strategy to increase our exposure to coastal tier one markets, we sold $276 million of assets and the fourth quarter comprised of two facilities and the far northwest sub market of Indianapolis and one in the far northeast Submarket of Atlanta, one facility and the western portion of the Lehigh Valley, and and asset leased to Amazon and Houston and.
And turn we use these proceeds to acquire two assets in southern California, and a portfolio on Seattle for $305 million and.
In aggregate, our 74% leased with an expected initial stabilized yield and the mid force and long term IRR Unlevered IRR and the mid sixes and <unk>.
Seattle portfolio and encompasses three buildings that are 69% leased and aggregate located in the parts of that market and adjacent to an existing facility, we'd about several years ago.
For the full year, our capital recycling and compost $322 million of asset sales and $423 million of acquisitions.
And with the development of previously mentioned by Steve This activity moves our coastal tier one exposure to 41% of JV and our overall tier one exposure to 67%.
We expect this recycling to continue in 2021 with dispositions primarily from the monetization of some of our Amazon assets, allowing us to manage our tenant exposure as well as some midwestern assets to further refine our geography I'll now turn it over to Mark to cover our earnings results and balance sheet activities. Thanks, Nick and good afternoon.
And everyone I am pleased to report the core of our filter of the quarter was <unk> 41 per share compared to core <unk> 40 per share and the third quarter and represented a seven 9% increase over the 38 per share reported from the fourth quarter of 2019.
Core <unk> was $1 52 per share for the full year of 2020 compared to $1 44 per share for 2019, which represents a five 6% annual growth rate.
<unk> as defined by NAREIT was $1 40 per share for the full year 2020, which is lower than the core <unk> due mainly to debt extinguishment charges. We grew <unk> by six 2% on a share adjusted basis compared to 2019.
Same property NOI growth on a cash basis for the three months and 12 months ended December 31, 2020 was three 3% and five zero percent respectively same property growth from the quarter was driven by continued strong rent growth and a 20 basis point increase in average commencement occupancy within our same property portfolio from the <unk>.
Quarter of 2019.
Net operating income from non same store properties was 17, 3% of total net operating income from the quarter share.
Same property NOI growth on a GAAP basis was three 1% from the fourth quarter and two 8% for the full year 2020 bad debt expense for the year was primarily related to noncash straight line and reserves, which negatively impacted GAAP same property NOI.
We finished 2020 with $295 million outstanding on our unsecured line of credit, which we refinanced early this month with a $450 million, 175% 10 year Green bond issuance, which will bear interest and an effective rate of 183%.
The pricing on this transaction was very attractive which of our effective rate of incorporating a 70 basis point spread over treasury rates, which at the time was the lowest credit spread ever on a 10 year bond offering.
We intend to continue a robust pace of growth and 2021, which we anticipate to fund with the combination of asset dispositions internally generated cash flow short term use of our line of credit and of potential unsecured bond issuance later in the year also of additional growth opportunities arise. It's possible we issue a modest amount of equity.
Through the ATM on an opportunistic basis from a macro outlook perspective, we expect 2021 environment to the overall relatively strong and improving each quarter and light of the expected federal stimulus and vaccinations.
Supply and demand are relatively and balance the overall fundamentals picture is quite supportive of continued market rent growth and thus a positive setup for pricing power and new development starts with this as a backdrop yesterday, we announced the range from 2021 core <unk> per share of of $1 62 to $1 68 per share.
And with the midpoint of $1 65, representing an eight 6% increase over 2020, we also announced growth and <unk> on a share of adjusted basis to range between five 8% and 10, 1% with the midpoint at eight zero percent.
Our average and the service portfolio occupancy range is expected to be 95, 7% of 97, 7%.
Same property NOI growth on a cash basis is projected in the range of three six to four 4% our guidance for same property NOI includes the negative impact from a few 10 and Steve mentioned that we expect to terminate and early 2021.
We expect proceeds from building dispositions and the range of $500 million the $700 million.
Which we will use to fund our highly accretive development pipeline.
Acquisitions are projected in the range of $200 million to $400 million with a continued focus on infill coastal markets and facilities with a repositioning of Alicia potential development starts are projected in the range of $700 million and 900 million with a continuing target to maintain the pipeline and a healthy level of pre leasing our pipeline and bill.
Suit prospects continues to meet continues to remain robust and the $800 million midpoint of our 2021 guidance is consistent with our actual development starts from 2020 most.
More specific assumptions and components of our guidance are available on the 2021 range of estimates document on the Investor Relations website now I will turn it back over to Jim for some final comments. Thank you Mark and closing I'd like to reiterate what a great year of 2020 was for Duke Realty amidst the pandemic and a recession.
As we look ahead into 2021 of the demand drivers remain exceptionally strong supply and demand remain in balance and we anticipate another year of strong results. This is evidenced in our 2021 guidance of $7 million to $900 million of expected New development starts strong occupancy expected to remain elevated and most of all evident.
With our expected growth and <unk> per share and <unk> of $8, six and the 8% and the mid points respectively.
This level of growth is what we believe should be achievable on a consistent basis going forward. Our performance is the result of a decade of portfolio repositioning with the steadfast focus on quality investing and selective submarkets and strengthening our balance sheet.
We will continue to see the added value created by our dominant development platform and we believe we continue we can continue this level of growth well into the future.
Finally, I'd be remiss if I didn't thank all of my colleagues of Duke Realty for all of their hard work and dedication that has allowed us to achieve the level of success that we have they also want to thank our investors for their continued support and the recognition of our good stewardship of the invested capital.
Now we will open up the lines for questions. We would ask that you limit your questions to one or perhaps two short questions. You are of course welcome to get back in the Q also please remember the prop per our system is now one zero Sean you May open up the lines for our first question.
Thank you and ladies and gentlemen, as a reminder, if you do have a question. Please press one zero at this time, our first question will come from the line of Blaine Heck of please go ahead.
Great Thanks, and good afternoon.
The or Jim maybe we've certainly seen a little bit of the population shift as the result of the pandemic, maybe even and acceleration of a trend that we saw pre pandemic with with people moving out of higher cost of high density cities, like New York, and San Francisco and into Sunbelt, and Texas cities, which has been.
And very impactful to other real estate sectors. I'm wondering if you guys have seen or expect to see any impact to the industrial market in the cities as a result of those shifts and population and consumption.
Yes, Steve.
It's something we're monitoring and tracking obviously our sector is tied to population centers and population growth I think what we've seen particularly as it relates to the California, a little bit of net migration out but at this point its not something thats been impactful to our business. It is something we will.
Keep an eye on going forward.
Okay. That's helpful and then.
The second question real quick Nick can you talk about your disposition strategy for the year I. Appreciate the comments you made but maybe get into a little bit more detail. If you can how much of it will be portfolios versus one off assets and how much of the disposition goal or guidance is made up of those properties that.
Our lease the Amazon.
Yes, I would tell you blamed most of them will be.
One off transactions or maybe a couple of assets two or three and a small portfolio going forward on this.
Far as mix I would say greater than 50% would probably be Amazon volume.
And with a smaller amount of Midwestern assets mixed in and.
In terms of volume I think it will be spread out pretty evenly throughout the year.
Alright, thanks, guys.
Thank you.
Our next question then will come from the line of so much turmoil. Please go ahead.
Hey, good afternoon, guys. Thank you for taking my question and I did get the net.
And the memo on the.
On the dial in information and so one deal with the Covid I got that right. This day.
I guess my first question is do you have any exposure to the gamestop.
Alright Thats helpful.
So could you give me more color on what are you seeing and Atlanta.
Im seeing a lot more and marketing materials on.
And Atlanta warehouses that talk about tax incentives enable share data et cetera.
And even the pretty big books, and so it does mean that these assets and not easy to leads.
And I know that you guys sold an asset that was weak and this quarter.
I understand it's de minimus and all of that but I'm, just getting a sense of.
How does all of the things how does it and the recent sales perhaps many of you.
And.
And the sub market in terms of exposure and are you looking to sell more from markets like this.
Sure I'll jump in and Nick you can add as well I think Atlanta did see a significant amount of construction and the last couple of years and so.
It's been one of those particularly in the northeast side and the far south of that we've had our eye on in terms of we've talked about sub market level.
Data, but.
You look back at 2020, and Atlanta had a record year and absorption with but I think 26 million square feet absorbed in 2020 so.
We've seen pretty good activity come back and that market I wouldn't say that debt.
It's out of balance on a macro level again, I think you won't see us investing and far south of Atlanta.
As you move down 75 or far northeast.
And the disposition, we had there was up.
Property and a market that we felt was a little soft and we felt we could we could take opportunity and get our vacancy mode, Yes, I wouldn't read too much into the disposition we.
We have very little exposure and the far northeast sub market and we don't have any vacant land there right now so and just a couple of assets left.
Thank you for that and then.
Interest and understanding the level of interest on your asset and on right and Sweden I think it's in Paris.
The 30% of your development.
Footage so intrigued if you have any discussions on.
And the day, because we're kind of take on and more importantly, what sort of free rent would you offer on on the asset like this.
Net the normal sort of.
500.
<unk> square feet of below.
Sure Yes.
Yes, we do have very good activity on and we're very early and the construction process, but.
As you've seen and any of the write ups.
California, particularly and the large size segment.
And has been very very active we've had great success. We've built I think nine buildings out there and eight of them have been leased before we finish construction.
And that Submarket so.
I think we will see similar results on this one and <unk>.
Terms of your question on concessions of free rent.
And there's really not much in terms of concessions and the market today.
There might be a little bit on the front and with some deals where a tenant is invest and a significant amount of money and the space that need some fit out time, but thats, usually factored and the overall lease term.
Okay.
Alright, thank you.
Thank you. Our next question will come from the line of Dave Rodgers. Please go ahead.
Yes, good afternoon, and Steve I was wondering if we could just of a more robust discussion on the tenants that you will terminate and the first quarter the events space and other tenant.
Could you dive maybe more into the size of that aggregate tenant base and the impact you expect on occupancy downtime and then you mentioned with good long term. So what are the leasing spreads look like on something like that and just trying to get a gauge how and how much of thats impacting same store and the overall results for the year.
Yes, Dave I'll start and and Steve can add some color.
About 25 basis points on both of revenue and and occupancy number more of the process of existing three or four tenants non.
None of them individually of significant like I say, the add up to about 25 basis points, we've been collecting rent on from all of them through security deposits. So I actually don't think it will be coded as bad debt. When it's all said and done it's part of our decreased occupancy guidance.
And there probably will be towards the end of the first quarter by the time, we get those tenants out and then I'll, let Steve talk about the backfill prospects.
And I'd just add that we do have good prospects.
The Central Florida, Atlanta, DC or are the three areas, where we've got a couple of smaller.
Sized tenants that we're dealing with.
And we prefer not to go through the eviction process and work the final backfill and workout on our reentry arrangement with the kind of to get out of the space. So I.
I think youll see us backfill probably half of that space and are fairly short fashion.
And I would say our rent growth on those will be consistent with what we've posted in this past year.
Great and then maybe just the follow up on the occupancy finished the year.
Strong level.
Can you talk about short term leasing if any of that you experienced in the quarter, how that might impact the roll forward into the first quarter and just kind of what your experience has been with shorter term leases and economics.
Yes, I'll start and the thing that he wants to add and.
You asked the question I think early in 'twenty, David and <unk>.
Think we thought it would start to fall off but I think.
As the pandemic drug out.
It was it was a pretty consistent theme.
So our short term leasing this year was was I think 14 or 15% of our overall volume, which is a little higher than what we did and 19.
And again I think if you think about the uncertainty and the economy and some of the.
The pace of which change was happening and thats kind of consistent with what you would expect.
I would imagine it would normalize more towards that 10% as we as we get to with the vaccine and things starting to level out.
Okay, great. Thanks.
Our next question line of Emmanuel Korchman. Please go ahead.
Hey, guys.
In terms of the tenant exposure metrics just wondering how much of.
Arm wrestling competition was between Steve and.
Nick.
King about sort of we have too much exposure of this one single tenant or this is the tenant and everybody wants to own and so we're going to get premium pricing for the assets.
Which way sort of you guys were thinking about the situation.
Well I'll start and Steve can the agency.
Takeaway and hopefully won't hit and the RNA.
Our and our strategy with tenant diversification.
The field is incurred.
Encouraged to do as much business as they possibly can with Amazon and then we will take care of the exposure issue at the corporate level through through one off sales or potentially JV and the future of something like that or or whatever so.
We're not like not doing business with Amazon to manage our tenant exposure. We do all of the business. We can and then we'll just manage that on a go forward basis.
And.
And the only thing I would add is I think and.
We know them very well they know us very well they understand that our requirements for where we want to build where we want to own the types of assets, we want to have to work for us as well as for them.
Got it thanks.
And then Nick just thinking about the the opportunity set out there to buy stuff.
Obviously hard on obviously, a lot of capital chasing it, but our sale leasebacks potential opportunity to get the some assets or is that not a market and the year.
You guys are on plan at.
And it definitely is.
And opportunity for us we've done a few of those we did one and Seattle, We just don't want and southern California.
And last quarter, obviously, we're very cognizant of the credit risk.
And sometimes we can mitigate that credit risk either through below market rents.
Or perhaps some redevelopment opportunity down the road. So we look at them quite often and obviously the fully marketed stuff.
We're not that competitive on given where pricing is we feel like and better use of our capital and some of the more lightly marketed stop and then obviously our funding our development platform.
Great. Thanks, Paul.
Our next question will come from the line of Michael Carroll. Please go ahead.
Michael Kelly Your line is open.
Alright.
Mark I was hoping you could talk a little bit about the the bond issuance that you guys just completed at pretty attractive rates.
Can you be more aggressive and maybe refinance some of the near term debt maturities that have slightly higher interest rates. The kind of take advantage of the rate environment right. Now is that something that you guys and pursue.
Okay.
I guess, we took my hope, but there is obviously the cost associated with that I think of better use of our of bond proceeds right now of the development pipeline quite honestly and.
And we'd run out of line of credit up to $300 million.
And so this really took that down and just the some excess cash to pay for some development early in the year. Our bond maturities are very very minimal until we get off of 2023.
If we ever before we sit on cash for the long period of time, we could look at taking some of those out certainly I think our average borrowing rate on the the debt coming out of pushing 4% and we just did and the old 175. So there is certainly some upside there, but you know what.
The make whole costs and things like that.
There is of course the entire response.
Okay, and then just just a follow up on that real quick on the I guess, the recent green bond issuance I guess the.
Press release, and kind of highlighted that you were able to make some eligible green project investments can you talk a little bit about those and how meaningful of those costs.
Yes.
Going back and Steve Correct me, if I'm wrong here, a year and a half ago. We made a commitment that every new development. We do is going to be LEED certified. So really every development. We have started at 800 million of year for the last year and a half are all qualifying projects. So it's quite easy for us to allocate this 450.
And as Bob to all of those eligible projects. So it's not really of new thing, we've had and I want to say pushing 20 lead projects before that commitment, but every commit every project. We started in the last year and a half or so and.
And so we've got well over $1 billion worth of qualifying projects. So this is just a little piece of that.
Sets us up to just continue to do green bonds and the future quite honestly.
Thank you.
And our next question comes from the line of Caitlin Burrows. Please go ahead.
Hi, and good afternoon, and maybe just first following up on the comments about the short term leasing you mentioned debt in 2020 with made in 14, and 15% and sort of volume and that would be closer to 10 could you just go through how long the R&D sort of 10 leases the EU and you end up getting a premium on pricing.
And what makes that kind of the right decision for you guys from 2020 and going forward.
Sure, Yes, we defined short term is anything less than a year.
So I would say the probably I don't have an average here, but they probably average eight to 10 months.
And typically it's the tenant needs the hold over longer than they intended to move out or at the short term requirement for excess space because as you imagine a lot of construction projects got delayed and the middle of the year because of the pandemic. So people were had excess supply of they needed to put into inventory of intuit.
The warehouse.
Yes.
Usually able to get a premium obviously youre not spending any capital and capital. So near term. It can help from a cash flow perspective, but it also helps of times with some of our existing clients. The serve a solution for them and and turn into a long term deal for us. So there's a lot of different factors that weigh into our decision on it.
Got it.
And then maybe just one on development in 'twenty and 'twenty, you guys start and about $800 million.
The development midpoint guidance for this year, it's similar.
Could you talk about the runway for this amount of activity to continue growth from there as the demand side of it but also just your ability to get the land and complete projects and the target.
Sure.
Yes, we are.
We had a very strong finish to 2020 over $420 million of projects.
I would say activity starting out this year looks very strong.
We've got every project our whole budget of the.
And as part of guidance of $800 million has got identified projects.
We're very prudent about our pre leasing percentage so.
And our toughest job is finding and secure and build to suits to the fee that pipeline as well as Franklin and spec projects.
It's getting harder and harder to find land sites and infill markets. Our teams are doing a nice job, but thats.
The governor of not only for us, but for the overall market and I think thats, helping and keep it and balance.
But hopefully we're sitting here a year from now saying that we did better than the than we had thought we would do.
Okay. Thanks.
Our next question comes from the line of Rich Anderson. Please go ahead.
Thanks, Tim good afternoon.
So.
So when you were formulating your outlook for 2021.
I'm curious how much of an influence was perhaps the prospects of.
Some some economic disruption from from increased taxes.
The the pull forward of demand that happened in 2020, and how that may be difficult to replicate and 2021.
And how much how much you've kind of kept an eye on the ball a little bit from from the standpoint of the expectations. So that perhaps you can maybe.
Not that you sandbag, but that you can maintain at least from core beat of as you go. So just curious how that how all of those factors weighed into the the outlook for 'twenty and 'twenty one.
Yes, rich it's Jim Let me, let me give you a couple of observations.
We have not factored into our 'twenty one guidance.
Any real thoughts or outcomes.
Any of the proposed tax changes I think it's obviously a little bit too early.
I think the consensus is.
Whatever gets done.
Whether it's through budget reconciliation of our it gets through both houses as part.
And by going to take effect and in 2022, So we will have a little bit more clarity.
I think any conservatism that is baked into our budget for 2021 is just.
And he is us being conservative given where we are and the economic recovery and where we are and the pandemic.
And we all had great expectations and the in the pandemic that so many more of us would be vaccinated by this time and.
Things will be back to normal.
On top of the second quarter, and I think expectations and as it's going to drag out a little bit longer.
And what.
Last year's last round of stimulus is going to do and is there going to be another round of stimulus. So.
The prudent course of action was.
To bake, a little conservative as and in there but.
And we've discussed and Youll see that its consistent with pretty strong performance that we've had and 18 19 and 20 and so we feel very comfortable we're able to achieve it and as Steve just said a few minutes ago.
I hope to be sitting here and in April of the July on the.
The first or second quarter call, telling me of the things we're off to a really strong start and we're going to raise guidance.
Okay, and just the gist of it.
Curiosity question are you guys involved at all in the and the distribution of the vaccines and I'm sure. You don't have 70 minus 70 degree refrigeration.
Systems were maybe too, but I'm just wondering if that's a short term benefit at all to your business.
We actually do have some really call the freezer space, but no. We are not involved and the vaccine I think it's full of ice cream and French fries and unfortunately.
And.
Good day me.
Thanks very much.
Sure.
Our next question will come from the line of vacuum Malhotra. Please go ahead.
Thanks for taking the question.
And maybe building upon that last comment about leasing guidance and just kind of hoping to beat them.
And even a better position media I'm, just sort of wanted to get your sense of bit longer term and the pool.
Covid World with higher E commerce penetration and all the other dramatic trends, we're hearing about where do you see sort of three years four years.
The number seems to NOI growth even at the high level at this point, we're not in the hold you to it and just sort of wondering kind of from a cycle and semantic perspective.
What you how you view sort of the medium per molecule from the same store perspective the.
And don't get Us Youll hold you'll hold me too and I know you will.
Yes.
No all kidding aside.
<unk> said at the.
The start of this call and other calls and other presentations.
We think the next five years for our sector holds great opportunity. This is not just.
E Commerce as a result of the pandemic.
We do believe that the growth and E commerce sales further penetration and more customers more products, we will continue.
That is not likely to reverse that trend, we've talked about near shoring of our onshore and our production and manufacturing of that driving more of the need for more distribution space, we've talked about safety stock on the.
The inventory sales ratio as low as it is major retailers and consumer products companies out in the last part of last year of the beginning of this year, taking significant allows of space.
Reverse logistics the.
Handling and the returns efficiently from all of this increased E commerce sales all of those things.
Along with just increased U S and assumption.
As.
And it creates a very very bright outlook for the next three to five years and.
And let me just add from numbers I can't believe nobody is asking the bad debt. So I'll just kind of try to cover that right now and our 4% number for this year.
And short aggregate, Jim I think the 4% guidance for the issue is sort of the baseline to think about as we go forward could go north of there because in the 4% guidance for this year, we've got 30 basis points of bad debt and that number.
Our run rate has been well less than 10 basis points. So we got a little bit more bad debt baked in the number for some of these tenants like we talked about.
But I think thats, a higher than normal run rate.
And that 4% is about a two 5% average rent bump number that we've been talking about for a few years now yes, we're doing all of our new deals at 3%. So that two 5% continues to growth.
And then we're very bullish like Jim said on all of those factors that will continue to drive rent growth close to where we've been and if you think about it.
Like Nick said, we're 40% of our portfolio right now and these coastal tier one markets yet that was about 20% of our role so that will continue to be of higher piece of the role as we move forward.
Beyond 'twenty, one, especially so I think we're very bullish and 4% of kind of a good way to think about of baseline and we'll give we'll adjust guidance from time to time based on the over the other factors but.
And just give you some insight as to how we came up with the 4% of this year.
Net debt that's really helpful. You sort of took a.
And my second question. So thanks for that I can ask you one more just on the on the on the comment from a near shoring of reassuring.
And any actual evidence of or anecdotes, you can share with the across any markets and the U S. We've heard from some of our own colleagues that cover industrial and Mexico of several examples but I'm. Just wondering if you have any examples and the U S from that.
The nominees.
I would tell you and Steve can add some color.
The earliest and the most prevalent ones that we've seen business that that we're chasing has been and Texas. So I think thats logical.
And more business that was protect perhaps in the far east moving to Mexico, I think a lot of people expected early on with the push.
From the federal government debt.
Medical devices bio and pharma would be one of the first to make the move.
A lot of the stuff that we're seeing is more consumer products industrial automotive related out of Steve you can give some more color yeah I would just add I think.
We're not as close to the manufacturing side, but some of that has particularly down south and towards the Carolinas.
I know theres, a number of requirements and the marketplace for that we've seen it on the auto side. There were some there were some a lot of headlines around from plants that closed and and ultimately ended up and the re shoring of of supplies to the manufacturer.
And that ended up and the U S.
Those of requirement with with Nike that happened in the middle of the country that.
Again as the re shoring of what the shoes that used to come from overseas that Theyre now keeping the one product line here and on warehouse and the middle of the country. So yes, there is more and more examples of every day of of that taking place.
Great. Thank you so much.
Our next question and that will come from the line of Mike Mueller. Please go ahead.
Yes, hi.
You talked about the cap rate expectations for the personnel asset dispositions and.
The second question here of three to five year target for where you want that Amazon concentration today.
Hey, Michael this is net.
The cap rates are a little bit all of our board dependent on obviously the asset what is the asset and as the tenant what the term is where the rent is to market.
So it's a little bit all over the over the board and by geography, it's and.
But I would tell you that.
It's it varies and the low fours to.
Mid fives I would say.
Overall, and then as far as long term Amazon exposure, we don't have any hard and fast numbers, obviously, we're not overly concerned given the credit profile.
But yes, we probably maintain it somewhere.
Around 4% to 8% on a go forward basis.
Got it okay. Thank you.
Our next question and that will come from the line of Brent Dilts. Please go ahead.
Hey, guys. Thanks on mostly covered on the questions, but I do have one on development guidance you continue to highlight the strength of the build to suit pipeline. So how.
How should we think about spec development and this year given that the average 40% of your pipeline historically, but market demands on strong.
Well, let me give you a macro comment and then Steve can give you a little bit of detail.
I would tell you we have three 7 million square feet of of vacate spec and our entire portfolio a great deal of that if not even completed yet and for a company of our size, that's too little inventory and in the market of strongest today. So I would tell you we expect to ramp perspective.
It went up.
Having said that we're still committed to try and maintain the pre leasing percentage of that development pipeline at or about 50%. If we're going to dip below we generally try and tell people.
What the result is if it's time and or something like that but we need to create.
Some more inventory for ourselves around the system, we did so much leasing and the second half of the year.
We need we can.
Need to fill the coverage so to speak.
Okay, great. Thank you guys.
Our next question will come from the line of Nicholas from please go ahead.
Thank you for taking the question.
Seems like there continues to be a lot of new investors coming into the industrial space and could you maybe provide some color on what youre seeing with the transaction and secured debt markets and could you, possibly see cap rates compressing further from here.
I'll cover the secured debt market and the outlet.
Nick to the reps and probably not the best person, we've talked to and secured debt market. Because we are entirely committed to being an unsecured borrower, but I would tell you the rates from what I hear and see out there.
We're still very attractive and the.
The call and give or take 3% range, depending on the asset quality and geography and tenant makeup and then I'll, let Nick talk about yes, yes.
Yes, and I think there is low interest rates and a ton of demand from investors.
I think you just saw of recent transaction with exit or where.
The <unk>.
Investor There was not really and industrial and it moved to get more exposure to industrial and I think youre going to see more and more of that and I and not willing to say cap rates can't go any lower anymore. Because every time I do they do go lower.
Our very low right now but.
With this increased demand and all of this good activity on E. Commerce side, I think that there is still downward pressure on on cap rates as we move forward.
Alright, that's great. Thank you that's all the house.
Yes.
Our next question comes from line of John Kim. Please go ahead.
Thank you your debt.
The margins improved to 30% to 40% this quarter.
Realized now you're expecting cap rates are you picking up on your assumption of four basis points, but can you provide the breakdown of the margin improvement between the higher rents and lower cap rates and.
Uh huh.
I'll start I don't have the the exact numbers for each of the categories you talk about but I would tell you that it's really not cap rate driven the reason the cap rates came down was just moving properties out of the pipeline put them in service of moving new projects and of the construction and most of the construction, we're doing our and the coastal tier one markets.
And have lower cap rate. So it's not really too much related to a methodology change and the cap rate, it's just a mix and and the overall reason that the margins are coming down.
You mentioned and it is.
Rental rate ratios are better than we expected and were leasing of our assets quicker than our original underwriting. So when we start a project, we always underwrite 12 months of downtime and thats baked into our our basis of the carry cost of about 12 months.
And then we're typically.
Not always but a lot of these a lot of these projects that are and there are getting leased before they even though on service. So you take a full year of carry cost out of that equation and that drives the margin up pretty quickly. So those are the two main drivers.
And on the Amazon Amazon asset to be sold during the quarter can you comment on how deep the buyer pool of.
Versus the prior sales and at the.
The follow up can you can you remind us why youre, reducing your Amazon exposure and Thats good.
And by credit rating agencies.
And the other reasons.
The highest credit tenants yes.
Yes, so as far as.
Investor buyer pool adapt it's very deep and it's very diverse.
You've got the domestic groups from foreign groups and.
Yes, there is no there is a plenty of supply and we get a lot of reverse inquiries as well.
The Amazon exposure.
Driven by the ratings rating and chief per Se, it's just a matter of just being prudent portfolio managers and maintaining.
The good diversification both in terms of geography and in terms of your tenant base.
That's the real reason, we're doing it we do.
Amazon is the tenant there obviously, a great tenant and we will continue to do a lot of business with them.
But we do want to manage the exposure.
Great. Thanks.
Our next question will come from one of.
Tayo Okusanya of please go ahead.
Hi, Yes, good afternoon, everyone great quarter, great outlook.
On the top 20 tenant list a couple of movements. There a couple of people dawn of couple of people moving on.
Each of the supply and a couple of others can you just kind of talk a little bit about some of that movement is that because of some assets with the old or big leases signed and just trying to understand some of that.
It's all of the above.
You can sell of 1 million square foot building and that will move somebody from the top 10 for the next year.
You can sell a couple of buildings.
D and HD supply's merger and move them up the list so.
It's all of the above.
We can talk specifically if you other question about who is new or who left and why but there is all of the all of the normal reasons you would think.
And it wasn't there's no one leaving because of.
And then they move down or they went through bankruptcy.
Net.
No no titles of the two big ones. The moved off the list was HD supply, but they just moved into the home depot line because of the merger and then the other one and moved out.
C and H and that was part of the Indianapolis assets that we sold.
Got you. Okay. That's helpful and then my second question.
And again, so many great.
<unk> for the overall business right now.
Typically.
Could you talk about the other side of the equation of kind of what would happen.
And some kind of impact to negatively impact the kind of.
Very strong multiyear story.
Multi year earnings growth story that we seem to have in front of us and we brought to the other day.
What would keep you at the proverbial what keeps you up at night question.
Well.
And the other 160 billion square feet and 20 markets Theres a lot of things that keep you up at night, but.
I would tell you first and foremost.
Is the supply side of the equation. If you look back at any of the downturn in our sector. The vast majority of them have been driven by oversupply, which is why we keep such very close on quarter over quarter of the <unk>.
Supply demand metrics of where overall vacancy is as you've heard us talk about our.
Our strategy is really sub market based so we tend not to be too concerned about macro numbers.
And we've talked about some of the soft markets around the country and how little exposure we have on them.
So.
That would be that would be first and foremost and.
Think.
Beyond that.
Some of the issues that we have been dealing with.
Trade tensions that would affect imports and exports.
Sub sector of that could be.
The trade tensions or tariffs that affect some of the construction materials create shortages of spikes in prices.
Labour always is the <unk>.
Big one for our clients, but it's one that we watch as well so.
As of probably the top three or four that debt.
And we watch on a regular basis.
Got you alright, thank you.
Yes.
Yeah.
Our next question will come from the line of <unk> Kim. Please go ahead.
Thanks, and good afternoon, everyone.
Can you provide some details on your 300 million dollar and non bank I guess curious about how much development and kick and support and if the rents are there and those market to support development economically today.
Sure.
Our $300 million land bank.
And is.
Probably needs to be a little higher.
Got about I would say that's about <unk>.
18 to 24 months of of development supply for us at the pace we've been developing.
As I think I indicated and if I didn't 80% of the land, we have and that and that bank is in coastal tier one markets. So.
Part of the plan is the one of the toughest things we do right.
It's very expensive and the markets, we want to develop its tough to get entitled the work through the process.
And as I indicated and Mike.
Points on the call a lot of it is redevelopment.
And typically adds environmental and risk like that that we need to.
The way through so.
Yes, we were on with 18 to 24 months of supply for our development pipeline and that's the.
That's a good.
The good pace to run at yes keep it.
Just a couple of comments.
In addition to the roughly $300 million, we have we've got another I think it's about 50 or $60 million and covered land plays.
Those are land sites that are covered by the leases.
And that will work their way back into the pipeline and.
And the future, but the other thing and Steve's absolutely right about the challenges with land today.
But every one of the developments that we have slotted in to make up that 800 billion dollar budget guidance suburb.
All but one of those.
And as land that we already own.
So we.
We're in pretty good shape in terms of the near term and on.
Our land and being able to move forward with the development that we have and the budget.
And Jim Your development pipeline the park has hovered around $800 million from the past four years.
And during that time, obviously dean Ted.
Thankfully grown bigger over that time, so and the development at the percentage of the company and the smaller number I'm curious if that it all comes into the equation when you're thinking about how much development and to do well how much you want to do.
<unk> $800 million pretty much hate the debt.
The pockets of demand that we see here is where we're going and build and.
And.
Comparing to the size of the company doesn't really matter I'm, just curious where youre thinking of debt.
No.
Thats a factor I would I would tell you a couple of things.
It's a very comfortable number that we know that we have the land.
The balance sheet, and the construction and development resources to be able to manage and.
2019, we were just over $1 billion.
And then before that you'd have to go back probably 10 years to two or three years. So we have the ability to flex up.
And and do volumes and access of that and if we had if we find the right opportunities we'd be happy to do that so I think it is.
The combination of the right opportunities of the marketplace. We've always said, if we accelerate development and our acquisitions. We've got a number of levers we could pull in order to from that.
And we can take on additional debt, we can tap the equity markets and we could accelerate disposition. So we've got the capacity. If we can find the right opportunities and the right markets keep that development pipeline pre leasing percentage, where we want it to be youll see us accelerate development.
And.
Okay. Thank you.
Okay.
Our next question will come from the line of Jamie Feldman. Please go ahead.
Hi, Good afternoon, everyone. This is all of this on for Jamie just.
Just a couple of questions. So in the opening remarks or during the Q&A, you mentioned and 17% of your portfolio is.
Non same store pool, and what impact will that have and the future on the 4% baseline that mark shared.
I don't have the hey, all of the CIS market I don't have the exact number but the way. It generally works is the year it comes into the pool, it's pretty accretive.
Generally these are the development projects and you always have a little bit of free rent on a development projects. So you have generally some free rent burn off from the first year of the second year of that makes sense by the kind of gets into the second year of the pool. Then it's just simply whatever the ramp up phase and.
Say most of the rent bumps were doing on development projects, depending on the lease term and the tenant and somewhere between two five and $3 five per share.
Okay. That's helpful and then.
I have one more.
On.
Occupancy question so occupancy.
And as expected declined 60 basis points at the mid point of view of a range, but the only losing 25 basis points from the tenants and they're moving out and <unk>.
Can you just sort of share with the other 35 basis points of move outs are coming from or is that just being conservative. This early on.
So all of US could you just I want to make sure I answer your question right.
Which numbers of you.
Scott.
And I know so you shouldn't of range of 96, 6% and 98 six but you ended the quarter at 98, one lease and you mentioned in your opening remarks or in the Q&A that you would lose about 25 basis points from the three of four tenants that youre going to a bit.
Correct. Okay. So yeah go on from 98, one down to the 97% et cetera question. So the gone down 50 basis points correct about 50 to 60 of correct 50 basis points yet.
Yes, so we will keep in mind the end of the year is one number of the 97 six years and average number okay. So.
Part of it is the 25% to 30 basis points of one tenant and then the other part of it is most likely do with some of the spec space that of them coming online and what were some spec space and some of these acquisitions.
So the if you look at all the components of the decrease is actually a little bit higher than the 50 basis points, but then we're very bullish on demand and the backs of a lot of that space like I said, so that'll get you back up but part of the problem is I think you are comparing on the end of the year number two and average guidance number for the next year.
Alright, Thats fair and since I waited so long and I'll just ask one more.
Any early thoughts on buying and.
Climate change and any particular focus on the for the industrial.
Real sector there.
Well.
And I can't tell you that.
We see any of his initial actions of the thoughts.
That are going to directly affect the industrial sector.
Other than as by American program, which is.
Really a continuation of the previous administration, and we've talked a little bit about what we think the impact of re shoring of nearshore and will be which is.
Potentially of positive for us the.
The one is the uncertainty about tax changes.
And whether there is of major overhaul of the tax code or the smaller things sell through of budget reconciliation. The other thing that obviously would be of concern to us is the elimination or.
Further changes to the 10 31 tax free exchanges and.
We monitor that situation, but the real estate roundtable and day rate.
Consistently does pretty good job working with the administration and both houses of what the impact with debt that would be and thats survive for many many years and so our hope is that we'll continue to survive.
Thanks, guys, great quarter and good luck on the year. Thank.
Thank you thanks, Joe.
Once again, ladies and gentlemen, if you do have a question at this time. Please press one zero on your Touchtone phone if you wish to remove yourself from key May also price of one zero.
Z wave of question from the line of Jamie Feldman. Please go ahead.
I think operator, I think that was our last question. So.
Yes, I think.
There was one more person in queue.
And given the 10 seconds otherwise.
Paul.
Alright, and we do have a question on from the line of Emmanuel Korchman. Please go ahead.
And.
Hey, it's Michael Bilerman here with Manny how are you the Buck.
Sure.
Yes. That's me can you hear me okay.
Yes.
Hi, Jeff.
Under the wire.
So.
And I know you're terminating some of these events.
Tenants and obviously you've had their businesses affected by the pandemic, but I wanted to know are you seeing any green shoots out there, obviously theres a lot of industries and a lot of tenants that have been negatively impacted by the pandemic and number of which have industrial space that have continued to pay because of it.
The space that they probably couldnt get if they gave it up so are you, having any conversations with like retailers or anything and foodservice and catering or office furniture or even like any entertainment based on your team would like the event the stuff that would use industrial where there is sort of looking at the next six to 12 months, everyone is going to get vaccinated.
Good things are going to reopen and theyre going to want to get the space. You mean, you may terminate and terminate those events tenants, but I just wanted to know are you.
Are you seeing anything that gives you more and enel.
Other demand driver right. We all know about all of the great things that you talked about earlier about industrial but could we see and even greater impact and a lot of these other businesses start to take it and I just didn't know if there is some color that you can share with us.
And all happening in your conversations.
Yes, let me, let me start out of high level of Michael and then Steve can give you a little bit of a little bit more color.
That's actually conversations on a process that has been going on for virtually almost a year of about 10 months.
Which is the conversation with any of our clients that are in.
The stress cash.
We have very open and candid conversations we go over all of the financials and we decide if we think its worthy of us giving them. The short term rent deferral to help them through this crisis, because we think underlying they have a good solid foundation of the business and as we reported.
And I think of the second quarter last year, we did 85 ish rent deferral agreements with tenants across the country.
I think our people have done an outstanding job the in terms of making the decisions. They did with the people. The good because we're getting complete repayment on the all of those the hurdles. We've had a few people come back to us and say.
And we thought six months was going to be enough and we.
We need a little bit more time, and we're working through that process again.
But I don't know of anybody.
That did the industries that you outlined that.
Can't pay today that we think is going to come back even stronger I mean clear.
Clearly convention tourism.
Out of those businesses have been hugely negatively impacted and will come back someday, but we're not engaged I don't think at least and individual tenant discussions steep on it you sure. The only thing I would add I think we've.
And we've seen some tenants pivot the way, they're doing business and and trying to adapt and we work with some of those I think in terms of a bright spot coming out of this there is theres certainly been a number of mentioned, but we didn't I don't think we've touched on it on this call the reverse logistics.
Continues to be of field that I think we will see significant growth from.
You think about tarot happy returns.
UBS just the acknowledged they were returning 9 million packages of weak around the holiday season.
As we shift towards the digital economy I think.
And that whole customer segment, and how that how those goods and back into the supply chain is the is.
A big demand driver for our segment.
Okay. Thanks for taking the question.
Sure.
Thank you.
Yes.
At this time I have no further questions in queue.
Thanks, Sean I would like to thank everyone for joining the call today and look forward to seeing many of you in person at the various REIT industry conferences throughout the year. Thank you.
Thank you that does conclude our conference for today. Thank you for your participation for using AT&T event services you may now disconnect.
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