Q3 2021 Duke Realty Corp Earnings Call

October 28, 2021

It wasn't a happy guy.

Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty Earnings Conference call. At this time all participants are in a listen only mode. They don't have a question and answer session and instructions will be given at that time. If you should require assistance during todays call. Please press Star then zero as a reminder, today's call is being recorded.

Now I turn the conference over your host Ron Hubbard, Vice President of Investor Relations. Please go ahead.

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

Joining me today are Jim Connor, Chairman and CEO, Mark Downey, Chief Financial Officer, Steve Schnur, Chief operating Officer, and Nick Anthony Chief Investment Officer.

Before we make our prepared remarks, let me remind you that certain statements made during this conference call may be 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 refer you 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 28, 2021, and we assume no obligation to update or revise any forward looking statements.

A reconciliation to GAAP of the 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 closed.

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 S E T.

He reports.

And an audio webcast of this call in the Investor Relations section as well now.

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

Thank you Ron and good afternoon, everybody the fundamentals in our business continue to be the best we've ever seen I will share a few highlights for the quarter and then turn it over to the rest of the team.

We now have three successive quarters of demand at or near all time records in projected market level rent growth has risen from the 10% range to the mid teens percent nationally and in sub submarkets as high as 35%.

During the quarter, we began roughly $350 million of new developments with expected strong value creation at Irr's and our and we raised our full year guidance on starts once again.

Cap rate compression in rent growth continued to outpace material cost increases, allowing us to drive improved margins.

The margins on our development pipeline are now over 60% and our core portfolio achieved record rent growth of 22% on cat on a cash basis from second generation leasing activity.

These quarterly results and our improved outlook for the balance of the year resulted in our raising key components of our 2021 guidance, including year over year core <unk> growth now expected to be at 13, 8% and growth in <unk> per share of 11, 6%.

Just on these results and our optimism about the balance of the year, we have raised the dividend by almost 10% Mark will go over these changes in detail momentarily now let me turn it over to Steve Steve to cover the real estate operations in more detail.

Thanks, Jim I'll first cover market fundamentals and then review our overall operational results industrial net absorption registered 121 million square feet, which is only 1 million square feet less than the all time record.

This was more than enough to offset the new supply is completions came in at about 79 million square feet with positive net absorption of our deliveries for the quarter reduced vacancy down to three 6% setting yet another record low.

The strong fundamentals increased nationwide asking rents during the third quarter by 10% compared to the previous year.

<unk> now projects demand for the full year in the mid 300 million square foot range and likely to break the all time 2016 record of 327 million square feet.

Completions for the year projected to be about 270 million square feet.

National asking rents for the full year are expected to be in the mid teens with some markets like Northern New Jersey, and southern California are likely to see increases of 30% to 35%.

The reaction to supply chain bottlenecks continues to be in the early stages of a longer term.

Boom for our sector with CBRE, reaffirming roughly $1 2 billion square feet of projected aggregate demand over the next five years.

Increasing inventory levels safety stock consumer spending and online shopping trends are driving much of this demand.

Demand by occupy occupier type remains broad based with E Commerce and logistics services companies continuing to make up roughly 60% of our activity with the E Commerce contribution about 10% lower compared to 2020 and the <unk> contribution of about 10% higher than this time last year.

It is also noteworthy that Amazon share of demand. This year is about 10% of overall total demand compared to 18% of demand in 2020.

Turning to our own portfolio, we executed a very strong quarter by signing $9 5 million square feet of leases the strong lease activity for the quarter resulted in continued growth in our rents within our portfolio as we as we reported 35% on a GAAP basis, and 22% cash, notably with only 25.

Or are transactions occurring in coastal tier one markets.

We now project, our mark to market.

On a GAAP basis within our portfolio to be 28%.

We started 349 $349 million of new development totaling two 2 million square feet that consisted of six speculative projects and two build to suits in the quarter.

80% of this volume was in our coastal tier one markets.

Our team has continued to lease.

Our speculative projects successfully as evidenced by stabilizing seven new developments during the quarter and increasing the development pipeline to 60% leased.

To put our track record of leasing speculative projects in context.

The $897 million of projects that we placed in service. This year through September 30 increased from 39% leased when the construction started to 90% leased when they were placed in service.

For all of our speculative developments, we started since the beginning of 2019, our average lease up time is less than two months from the dates of the projects are placed in service.

Our team's continued ability to quickly lease up speculative development projects will be a key contributor to our future growth.

Sticking with the development pipeline at quarter end, we totaled $1 $1 billion with 86% of this allocated in tier one markets and 60% pre leased.

We now expect value creation from this pipeline of over 60%, which is primarily due to rapid appreciation of rents and land.

We are also very proud to remind everyone that we target only developing the LEED certified standards. We expect the lead percent of our total NOI to trend towards 25% by the end of 2022.

On the construction cost side of things our teams have taken steps to mitigate schedule risks related to materials, such as contracting for steel nearly a year out and we've only had minor delays and a few of our projects.

The outlook for new starts is strong and is reflected in our revised guidance.

Midpoint being up $175 million.

On a longer term basis, we either own or control land, primarily in coastal infill markets that can support roughly $1 billion of annual starts over the next four years, if the supply demand picture remains robust, which we believe it will.

It is also important to note the market value of the land we own is about two times, our book space book basis and on average we've only owned this land for about two years.

Land, we control and we will be closing over the next few quarters is also well below market.

The favorable add value, we will continue to support high development margins and very good IRR is long term and overall, we believe we're very well positioned to continue to lead the sector in growth through new development.

I'll now turn it over to Nick Anthony to cover the acquisition of disposition.

Thanks, Steve for the quarter disposition proceeds totaled $738 million, including outright sales and contributions to joint ventures.

The outright sales comprise our entire remaining portfolio in St. Louis three buildings in Indianapolis and one building in Chicago.

The activity also included the first two tranches of the of the Amazon property contributions to our newly formed joint venture with Cvs <unk> global investors.

The pricing in aggregate was at an in place cap rate of four 8%, which was inflated a bit backed by a high five cap rate for the St. Louis portfolio in which pricing was impacted by expected rent roll downs on lending tax abatement explorations.

We acquired one facility in the third quarter totaling $24 million.

63000 square foot facility in the San Gabriel Valley Submarket of Southern California.

This third quarter activity has further shifted the geographic position of our portfolio on an NOI basis to approximately 40% in the coastal tier one markets.

Let me also note that just after quarter end in very early October we closed on the sale of the 517000 square foot Amazon facility in Columbus, Ohio.

This sale represents our final <unk>.

Operating dispositions for the year.

I will now turn our call over to Mark to discuss our financial results and guidance update thanks, Nick core <unk> for the quarter was <unk> 46 per share, which represents 15% growth over the <unk> 40 per share from the third quarter of 2020, <unk> totaled $151 million for the quarter compared to $135 million in the third quarter.

20.

Same property NOI growth on a cash basis for the three and nine months into 2021 compared to the same periods of 2020 was three 8% and five 3% respectively.

The growth in same property NOI for the third quarter and one compared to the third quarter of 'twenty was mainly due to rent growth, partially offset by an 80 basis point decrease in occupancy in our same property portfolio due to an extremely high occupancy comp of 98 six.

In 2020, our balance sheet is in great shape with plenty of dry powder to fund our growth we had $273 million of sale proceeds in 2031 escrow accounts at the end of the quarter that will be used to fund near term building and land acquisitions. We finished the quarter with reduced leverage as a result of the significant disposition activity.

During the quarter, but intend to return to recent leverage levels by the end of the year as we continue to grow through development.

As a result of our continued strong operating results, we announced revised core <unk> guidance for 2021, and a range of $1 71 to $1 75 per share compared to the previous range of $1 69 to $1 73.

Since per share the $1 73 midpoint of our revised <unk> guidance, representing nearly 14% increase over 2020.

For same property NOI growth on a cash basis, we have increased our guidance to a range of 5.0% to five 4% from the previous range of $4 75 to $5 two 5%, we continue to outperform our underwriting assumptions for specular development, both in the timing of lease up and in the rental rates, we're achieving while we have <unk>.

Entailed a solid list of build to suit prospects as well as land sites in various stages of due diligence and entitlements based on these prospects our revised guidance for development starts as between $1 $3 billion at 145 billion compared to the previous range of $1 1 billion to $1 3 billion. We've updated a couple of other components of our guidance.

On a more optimistic outlook as detailed in a range of estimates exhibits included in our supplemental information on our website I will now turn it back to Jim for a few closing remarks, thanks, Mark in closing I'm incredibly proud of our team's execution and leasing capital deployment and development starts we started the year with very solid growth.

<unk> have exceeded every one of them, resulting in a nearly 14% growth in core <unk> at the revised midpoint.

Our shareholders should be very pleased with our dividend increase of $2 five per share. This nine 8% increase marks our seventh straight year of annual dividend increases representing a growth of over 65% over that period.

Looking out to the next few years, our operating platform is perfectly positioned to take advantage of the numerous growth drivers benefiting the logistics sector.

These drivers combined with the under supply of new available warehouse product will allow us to maintain our high occupancy rates and rent growth, while creating substantial profit buildings margins on our 1 billion plus dollar development pipeline. The net result of these factors is our belief we can continue to grow earnings at approximately 10%.

Pace for the foreseeable future.

With that I want to thank you for your interest and your support of Duke Realty, We will now open it up for questions. We would ask that you limit your engagement to Walter perhaps two short questions and of course, you are always welcome to get back into queue.

Remember the prompt for this system for any question is.

One zero.

Sean will now open it up and take our first question.

Thank you I'm going to take our first question from the line of Dave Rodgers. Please go ahead.

Yes, good afternoon, everybody, Steve I think you alluded in your comments to about $1 billion of potential development starts over the next four years on owned land and that might have just been a nice average, but maybe the question for you or Jim.

You've historically said you wanted to limit the size of the development pipeline in terms of kind of your internal capacity now pushing 50% above that so how do you feel about that have you added people is it just more dollars can you give us some more color on that please.

Yes, Dave it's Jim I'll start out.

I would tell you that as.

Prices have grown on these projects. There is some there is some internal organic growth on the development pipeline, but given the success that we're having leasing up spec development virtually before it comes into service.

Has allowed us to ramp up to spec development pipeline that combined with the build to suit pipeline, which continues to remain healthy is going to allow us to operate at these at these elevated levels that we're seeing today. So steep view of more color on that yes, Dave we've averaged over the last four years.

Somewhere around $1 billion of starts we see that pace continuing we've got we've got land either owned on our books or.

Under control our option are covered land plays that continue to do that as long as the market bears.

As Jim said, our pre leasing and that pipeline remains best in class and as long as we are achieving that.

Growth through development.

And I guess, maybe just want to make sure I understand the point is we're not necessarily expecting a slowdown, but when you say $1 billion.

That's just more of an average over that period of time, given where you sit today at 60% pre leased we should anticipate that this momentum is continuing for your 2000 and about yes, yes, I guess I did.

I guess, maybe I didn't understand your question, we are not slowing down.

Given the market conditions, and our teams and what we control out there.

We like where we stand this year is obviously, we raised our guidance and we don't see that changing foreseeable future.

Dave I think.

Finish that point without giving 2022 guidance as Mark is kicking me under the table.

<unk>.

I think we I think we like where our elevated development pipeline is our ability to keep that pre leasing percentage high and that's one of the key contributors to our being able to drive.

This.

This high.

The high level of growth, 10% plus for the foreseeable future.

Great I appreciate you clarifying that answer and then maybe just the second was just other market exits now that St. Louis has gone as I said I heard you guys say no more asset sales this year.

The most recent Amazon sale, but I guess as you look to next year do we kind of re up that pipeline of disposition.

Yes, Dave this is Nick.

There is no specific other markets, we plan to exit.

We will continue to strategically prune assets.

Improve the overall portfolio, but I wouldn't expect us to see and in fact, I would actually expect disposition volume to level off after this year to be at more moderate levels going forward. Because we just don't have that many assets that we're looking to prune.

Great. Thanks, everyone.

Next we'll go to the line of Blaine Heck. Please go ahead.

Great. Thanks, Good afternoon, everyone Mark I wanted to ask about cash same store NOI. This quarter, obviously, it dipped a little bit from what you guys have been used to and number one was that all due to tougher occupancy comps from last year and then number two how should we think about the fourth quarter in that respect as it looks like the occupancy comps could be.

It's up again, but you also increased full year guidance. So just trying to reconcile those two factors.

Yes, Jeff sure Blaine, yes.

Yes, it's mainly just a tough occupancy comp.

Got to be careful to make it sound like we lost a bunch of occupancy, we're 80 basis points lower this quarter than last quarter, but our occupancy is obviously very healthy pushing 98%, but this time last year. We were at 98, six so that 80 basis point change in occupancy cost us about one two to one 3% of NOI. So.

If you were to just had a level of occupancy we would have been closer to five this quarter.

Youre right, we did raise guidance on our occupancy I think that we've got some momentum going into the.

The rest of the year here.

Youll see a little bit of an increase.

Overall, such that even though we do have that tough occupancy comp in the fourth quarter again, I think we won't lose the 80 basis points. So we'll be closer to flat in the fourth quarter and then if you just average the quarters out that would for close to a 5% give or take growth rate in the fourth quarter to get to our $5 two midpoint.

Great very helpful. Jim There's a recent article I read about Amazon kind of shifting from leasing buildings, the purchasing properties themselves, obviously, Amazon leases way more than they own and nothing's going to happen overnight, but do you see that as a trend that could become more.

The risks to the demand side of the market in the future or is it a little sensationalized at this point.

Blaine I would tell you I think it's a little sensationalized, because historically, they've they've chosen not to own anything.

They're very good partners of ours were very active of the Amazon assets that we have sold outright or contributed to the joint venture they have not exercised.

Many of their rights to acquire those so I don't think.

It's going to be.

Nearly as big a trend as some people might like to make it out to be.

The other thing I'll just I'll just comment is as Amazon Amazon continues to mature the markets. I think this is probably just a natural progression where they all start to control some of their larger.

Key facilities from our perspective.

We've really slowed down doing the big build to suits for them out in a lot of the secondary markets most of our Amazon activity today is infill and it's really.

Spec leasing or pre leasing of land, we have controlled and under entitlement that we're not willing to sell to Amazon or to investors. So.

I don't think its going to impact our business with Amazon at all.

Great very helpful. Thanks, guys.

Next we'll go to the line of John Kim. Please go ahead.

Thank you.

The cash leasing spreads you had in.

The historic high it sounds like.

Youre, not really favoring pushing rents too hard to get occupancy down necessarily but just wondering if that commentary you made on <unk>.

Occupancy is going to hold room.

Till next year.

And the second part of that is is there a big difference between the new and renewal cash rent spreads that you had this quarter.

Yes, John this is Steve Thanks for the question.

I think it's.

It's something we deal with on a daily basis with our teams and our tenants are clients.

The rent dynamic going up.

As is happening rapidly and it's something we keep we keep pushing on and trying to push the market on.

So.

Feel optimistic about where we're headed but it's a balance right to losing occupancy versus retaining tenants.

We feel.

Markets go up 30%, 35% so.

We will keep we will keep swinging in pushing rents where we can John.

Your question on the difference between new and renewal really not seeing much of a difference.

Like our tenants that are in the space coming up for renewal, we're getting any kind of oregon's at all.

The spreads are pretty consistent whether it's in a renewal.

Okay, and then you mentioned having success on leasing spec developments I imagine.

Have your competitors are having a similar amount of success are there any markets, where youre concerned that there is too much spec development.

That's being starting today.

Yes, I think the supply picture is getting some headlines about how much under construction projects are out there.

65% of the whatever you want to call it $450 million in the under construction pipeline, 65% of that is is in markets that we don't we.

We don't know property in.

So you look at Phoenix is getting a lot of headlines were not in Phoenix.

Some of the markets around Fort worth.

Not in Fort worth so.

<unk>.

I'd say I'd say the supply picture in the markets. We're in remains very much a balance as evidenced by the vacancy rates in the rent growth numbers.

But.

Yeah.

Very helpful. Thank you.

Next time, we're going to go to the line of Catlin Burrows. Please go ahead.

Hi, everyone. Good afternoon, you mentioned that.

You've been outperforming your underwriting assumptions for speculative development I was wondering given increasing cost the land materials labor do you think your development yields can stay in the mid to high 6% range.

Yeah. Caitlin this is Steve Thanks for your question.

Do I think.

Couple of.

So that one as I've mentioned, our land that we have on our books today is well below fair market value.

Our teams are doing a nice job of replenishing that land and being in the markets. They are able to find good deals that help us.

Some of those margins with with our land basis.

Growth has been.

Has been through the roof in the markets, we're doing well.

So it's more than offset it so I think as we look out into our pipeline I think youll see.

Margins, probably more importantly, I think margins have been expanding for the last.

A number of quarters for us is to get 62% margins right now in our development pipeline.

Great and then also I mean, it seems like speculative development is a great opportunity right now, but could you just talk a little bit about build to suit activity.

Potential partners, there just more impatient and the activity is going to speculative or build to suit activity also going strong.

Yes.

<unk> activity for US is still good I think to your point this construction material.

Issue that we're dealing with when do you think about the lead times for steel and for free cash.

Deals out almost a year right now.

Papering effect on what traditional build to suit has been I think we're starting to see with some of our clients is as them adjusting their specs to take more.

Thanks that are ready to go.

And I think.

You'll probably see that trend I think until some of these timing issues on materials begin to level out.

Got it great. Thanks.

Next we'll go to the line of Emmanuel Korchman. Please go ahead.

Hey, guys.

Jim I think in your remarks, you broke down the demand from E Commerce and three pls.

It was just interesting to hear the three pls have increased their business so much when.

Their inventories are probably the hardest for them to get especially quickly and thats. The business that a lot of them are in so are they taking space, hoping that the supply chain for their own inventories.

Ramps is it just not affecting that business or am I, just miss thinking what their businesses to thrive.

No.

The three pls are only taking space when they've got contracts for customers in the material is there customers material, so whether theyre doing <unk> work for.

Our pure.

Amazon, who does use three pls outside of their own supply chain or a traditional retailer.

They're they're fighting much the same struggles they've got labor issues they've got.

The flow of product that's been that's been somewhat disrupted but.

They're like everybody else, there theyre managing through us.

Best I can.

Thanks, and one for Mark maybe market. If we go back to the discussion on future growth any change in the way you plan to fund that especially with development.

And that becoming a bigger piece of that growth.

Manny you cut out could you repeat that please I said is there any are you thinking about future funding in any different way to sort of match that big of a growth profile that you're now talking about.

No I think the.

What I tried to point out is if you look at our balance sheet at the end of the quarter. Our leverage levels were really low we've been running right around call at five <unk> and debt to EBITDA and we're down more like four four I was just trying to point out that as more of a just a <unk>.

Short term timing blip sitting on a lot of 10 31 escrow money that will get redeployed here in the fourth quarter Youll see that leverage level by the end of the year, probably get back up to five <unk> on debt to EBITDA and then just kind of stay at that level going forward and will fund our business. The way we've been funding. It all along there will be first and foremost free cash flow, which were up to.

Over $200 million, a year now and free cash flow in.

Any additional beyond that it'll be a combination of debt equity and sell proceeds, but always maintaining that kind of final.

Longer term run rate on debt to EBITDA.

Thank you.

Okay.

Thank you draw the line of Vince Vaughn. Please go ahead.

Hi, Good afternoon, you mentioned only 25% in the third quarter leasing was in the tier one coastal markets, but that was an outlier versus other quarters. This year and then if you could provide some color on the 22 lease roll as well in terms of the mix of the tier one coastal markets that would be that'd be really helpful.

Yes, Vince.

The 25% is really not much of an outlier. This year, we've been doing 20% to 25% of our role in the coastal tier one markets for really the last year and a half or so while we're really just trying to point out. It is an outlier versus our total portfolio is closer to 40%. So.

We're newer in those coastal markets. So we haven't experienced the level of roll in those markets commensurate with our exposure in those markets if that makes sense.

So looking out beyond this year next year will probably look a lot like this year kind of a net 20% to 25% range rolling in the coastal markets.

You've got to get up to about $23 24, that's when we'll start really seeing an uplift in our rollover coming in those coastal markets. So I think we're still very bullish about our ability to keep putting up rent growth numbers right around what we've been doing.

And then looking out past now that's when you can really see an uplift and get even better based on the coastal market role getting higher.

Thank you that's really helpful. One more from me I mean, you mentioned that southern California, and New Jersey are the leading markets in terms of rent growth, which is no surprise, but what coastal markets or excuse me in what non coastal markets are you seeing the best rent growth today, how much lower is that growth compared to some of the best coastal markets.

Yeah, Vince this is Steve and I would tell you really need to dive into submarkets.

Look at.

The.

The airport market in Dallas, that's been a great market for us.

Chicago around the around the airport has had some really strong rent growth as well as the <unk>.

Five corridor there are some markets in Cincinnati, where we've had.

Huge rent growth in our portfolio so.

You really need to dive into the weeds some to look at those but obviously its seems to be.

Good in most places it's just.

Levels of how far you can push it in different submarkets.

No that makes sense it's helpful.

Are you seeing north of 20% rent growth in some of the markets you just mentioned.

Yes.

Well thank you.

Next go to line of Nick <unk> Co. Please go ahead.

Thanks, So I just wanted to talk about cap rates, a little bit you did reduce the cap rate on your development page. This quarter I think it was about 20 basis points can you just talk about what youre seeing in terms of cap rate compression in your markets and as well how we should sort of think about the number you cite on that page, which are specific to your.

Development pipeline.

Versus the rest of the portfolio, where you have some below market rents and presumably you know cap rates could be even lower in some cases.

Yeah, Nick I'll start and then.

Others can jump in but yes, we continue to see cap rates compress.

It's a little tough.

To sort of draw drop rod conclusions because we've seen so much volatility in rent it has such a large impact on the cap rates.

And so the assets dependent on.

When the leases have been signed or when they are being signed.

And so forth and when we originally underwrote them they can change quite a bit.

But yes, we continue to see the cap rate compression.

And it's really in all the markets in fact, we've seen the other major markets the gap between them and the coastal tier ones to actually decline to.

More narrow levels than what they had been historically, so it's been pretty broad based.

The only thing I would add to that and I think you were alluding to this is that 362 cap rate that's disclosed on our development portfolio and you've got to keep in mind that based on market rents because it's still under development. So the rents will be or our app market. I think if you took and looked at our operating portfolio we would.

<unk>, even lower cap rate because they are way below market, so youre going to get a lower cap rate because you got below market rents in our operating portfolio.

Right that makes sense.

And second question is just going back to I guess somewhat related but in terms of acquisitions. I mean last earnings call. You did talk about a sort of a bigger acquisition pipeline I think youre, saying it was almost $1 billion deal, but you didn't get.

Much done in the third quarter.

How should we just think about I mean acquisitions or have they now become more tougher.

Become tougher because of the declining cap rates I mean, how should we think about that aspect of the business.

The acquisitions have been tough for a while.

The deals that we're pursuing are not fully marketed assets typically we're trying to find lightly marketed or off market transactions I would say I wouldn't read too much into just the low activity in the third quarter, we still have a pretty good pipeline, we're working on diligence.

On several transactions in fact, we raised our midpoint guidance on acquisition about $50 million to $500 million.

This quarter. So we continue to find deals, but it's difficult.

Okay, great. Thanks, everyone.

Our next question will come from the line of Rich Anderson. Please go ahead.

Hey, good afternoon, everyone.

So.

Turning back to the supply chain disruptions.

We all know what's going on everything is costing more container vessels and rents for warehouses and I'm curious on what where the rubber meets the road for you in warehouses how how.

Impactful is that to you.

Our rent growth I don't know if you can quantify this at all but we obviously have great demand from e-commerce and <unk> going on but is there another layer of growth.

That's actually more than just a rounding error that's coming from the disruptions.

Yes, rich, it's Jim let me start and then Steve can jump in.

The supply chain has got a lot of a lot of ink lately a lot of airtime I would tell you that as a separate and distinct issue from the growth drivers that we're seeing we've talked in investor meetings and in our material about.

The five main drivers of our business today and that has nothing to do with supply chain that's growth in E Commerce sales reverse logistics near shoring and onshoring.

Safety stock.

That that's what our that's what's driving our customers' need for more space. If you go back and look at the ratio today, which has historically been between one four and $1 five sits at one one so what that means effectively is our customers need to bring in another trillion.

<unk> of inventory into the U S.

Huge huge amounts of space so.

It really doesn't have a whole lot to do with the supply chain disruption. It really is driven by growth in sales need for a lot of new facilities in a lot different facilities than a traditional we've talked in the past about.

The need for modern.

Buildings for fulfillment centers for infill development for last mile facilities, and our customers need a lot more of that.

Okay, and then so obviously a lot of the ink.

Incremental costs, sorry, sticking with supply chain theme, though.

The marketing passed onto consumers these days.

And we will see the longevity of inflation, but.

We get a GDP print of 2% growth for the third quarter.

Perhaps there's some risk that the fed could start to think about tightening to restore some order.

You know between the balance of consumer demand in the.

The supply of goods does this at all worrisome to you in other words, you know everything is great, but do you have your finger on the pulse of all those factors because if the consumer breaks down.

Can argue that something.

<unk> is given back in terms of your business.

Yes rich.

I would love to tell you I have my pulse on all of those things I don't know how closely.

But the reality is I think we all expect prices to go up I think we expect to see some inflation the level of which we will see when we get to the end of the year I think the fed has indicated that theyre comfortable with some slightly elevated levels for a few quarters before they before they really react.

So I think we can expect what we're experiencing.

To be with us for the foreseeable future.

And we'll have to see but as you look at consumer spending.

Today out there, it's driving a great deal of business for us.

No.

Okay. Thanks.

Next go to the line of Michael Carroll. Please go ahead.

Yes. Thanks.

Nick can you provide an update on the CBRE joint venture is the third tranche still on track to close in early 2022 and is there a desire both from you and <unk> CBRE to add to this joint venture in the near term is that something that could be announced as we go into 2022 also.

Yes, Michael the first two tranches are closed and then we've got a third tranche that consist of three assets that will close in January of next year, we push it therefore FERC tax reasons.

There are no <unk>.

<unk> assets that are.

Definitely going into the joint venture going right now, but we are talking about a couple of them and I would expect that to happen over time and as far as the relationship.

We've got a long term relationship with CBRE global.

Had other joint ventures with them in the past.

And the relationship is still very good and they are looking for asset and we're looking to identify assets that fit the profile that we want to put in this joint venture.

Okay, Great and then obviously industrial cap rates have compressed fairly meaningfully.

There are risk, especially for the properties that have long leases with these investment grade tenants that those cap rates could rise in interest rates or inflation rise if that ever happens.

Or are you just not see that given the demand for industrial just overall.

I would tell you that obviously interest rates matter.

But also rental rate increases matter too.

That's been a large piece of that driving down.

These cap rates.

Yes that could happen I would tell you that we've priced some stock recently and I know rates really haven't moved that much but they have moved a little bit.

We continue to see compression.

<unk> that so we haven't seen anything happen yet.

And then just real quick on what about the properties that have 10 year type leases, obviously, youre not going to be able to reprice. Those for the next 10 years, I mean cap rates still pretty sticky and potentially compress even for those types of properties.

They are still very good we just priced a 15 year deal recently exceeded expectations. In fact, I would tell you over the last 12 months.

<unk>.

Our dispositions.

We have exceeded the midpoint broker guidance by more than 10%.

Which is kind of unusual because they are usually very aggressive trying to win the business obviously.

Okay, great. Thank you.

Next we'll go to the line of Brent did please go ahead.

Hi, Good afternoon. This is <unk> on for Brent Dilts.

Could you walk us through your expectation on recapturing your mark to market lease spreads closer to historical averages over the next year or two.

Is this something you can keep up with or do you expect that 28% spread to widen further thanks.

Yeah, I'll take that one the 28% mark to market that we quoted.

You got to keep in mind that that includes every lease in our portfolio. It includes the leases. We just signed that are at or close to market. So if you I would tell you that what's coming at us over the next few years, we expect it to be.

Quite a bit better than 28%. So just look at this year were posted 35% gap growth this year and kind of high teens on a cash basis I.

I would tell you that's what we would expect looking forward over the next couple of years on our portfolio and.

And we do expect.

If market rents continue to move in a direction they've been moving even if theyre not as moving as fast as they had last year, but that 28% will grow.

But our overall mark to market, we will do nothing but get higher and will gradually as those leases churn will get.

Very good <unk> and cash growth from those.

Okay, great. Thank you.

Next we'll go to the line of Jamie Feldman. Please go ahead.

Thanks, I was just wondering your latest thoughts on getting at some of your early explorations early next year. So beyond kind of what's scheduled to expire do you think you can.

How much of that 'twenty three 'twenty four pieces, you think you can get early renewal of that.

Yes, Jamie So I think a good way to think about it is if you look at what we did this year if you would've looked at our supplemental.

At the end of 2020, I think it said, we had 7% of our leases rolling in 'twenty one.

We're going to do about 11% in 'twenty one.

So that's a combination of and I'm not talking.

Early pull forwards we disclosed in our supplemental any early renewals, we do beyond a year out.

But I think that.

As we sit here today looking at 'twenty two.

We have 7% rolling in 'twenty, two and I would expect at this time next year that we're going to be sitting here talking that we rolled 10% to 11% and 22 not seven.

Hey, Jamie this is Steve I'll add.

And I think we're starting to see more customers approach us on as well with the tightness of the market and supply chain issues. I think brokers are advising their clients to get in front of landlords earlier.

And given what's happened in the markets for rent growth. These are these are.

These are good conversations to have.

Okay.

We think that trend is accelerating.

Yes.

So do you agree with the 10 to 11 do you think you could actually do more.

Sitting here today I would tell you I think.

We'll see right.

As we look at what's happened to the markets and how tight the markets are and what's going on with rents.

<unk>.

We don't want to leave money on the table either so.

They won't be it won't it won't it would not materially differ from from a mark laid out.

Okay.

And then just thinking about the types of product you'll be building when you think about that but the $1 2 billion over the next five years of total demand and what are you guys thinking now in terms of good the right building side.

You're trying to go is until it's until you can but I'm just curious how you think that might change.

I'll start Jamie I think we look for the right opportunities in the market.

I know, obviously people think of us as a larger.

<unk> box company, we've got buildings under construction as small as 40000 feet. So it really depends on the opportunities we can find in the marketplace.

For Us I will tell you that the sweet spot is a is a larger building in infill market. Those are those are really really hard to find it and get through entitlements and produce so.

We build everything from 30 40000 feet up to over 1 million feet.

You can put it in the right place.

Okay. Thank you.

Next time, we'll go to Ronald Camden. Please go ahead.

Hey, just two quick ones for me just the first is just on the leasing.

$9 5 million a quarter and you talked about sort of the.

The new development, that's leasing up in two months, obviously a lot of that is reflected in the rents you're getting but is there anything different about the lease structure higher bumps or anything to call out.

Over the last two to three years.

This demand is just accelerating.

Yes.

In here.

I would tell you I think the biggest change we've seen outside of the headline rent growth.

Our sector is experiencing.

Escalations.

What youre seeing going on in inflation and I think all of us at high occupancy levels.

There is there is definitely a push in and taking what was traditionally.

Probably a 2% to 3% escalation and pushing that.

North of three so call it 3% to 4% Escalations are becoming standard in the marketplace.

Got it that's helpful. And then I just wanted to dig into the comments Adele.

Adulting comments about sort of mitigating I guess schedule risk.

And so forth so when youre thinking about construction, obviously owning land having control of land over the next four or five years is really helpful. But any more color in terms of so youre buying materials a year out early but.

What are you doing maybe different over the next three to five years in terms of.

Labor for example.

And are you going to continue to sort of.

By sort of deliveries a year ahead of time as Youre building out this pipeline. So just more color on mitigating that scheduling risks on the material and labor Rod.

I would tell you a couple of things.

I think with the elevated levels of development going on across the country I think we'd all like to believe that material supply will will get caught up and this is not.

A challenge that we're going to be dealing with for the next five years.

If it is I think we're one of the better ones position first of all we have the balance sheet, we have the ability to commit the dollars to these projects on land that we control so that we can secure the development.

In the time period that we want to put the project into production.

We have the expertise with our construction and development teams to get these projects designed.

Earlier and allow us to secure the construction materials in advance and keep our development pipeline.

At the high level. It is we've talked in the past couple of months about having everything in the 2020 pipeline secured.

Steve's teams moved into the first half of 2022, we've now got all of that secured and working on securing the second half of 2022. So.

It's an ongoing battle for us.

One that we'd like to believe that we will get back to some level of normalization, but.

The foreseeable future.

It's going to stay.

Hi, pricing and extended delivery times, and we're managing our way through it.

Okay.

Helpful. Thanks, Congrats on a great quarter.

Next we'll go to Kevin Kim. Please go ahead.

Thanks, Don just wanted to clarify something you said earlier.

I think you mentioned that you can do a $1 billion of development.

Per year for the next four years did you mean off of the land that you own and control or.

Or was that just an ignorant or longer term appetite.

That would be off of the land that we own and control and I think it's I think it's important by looking back over the last four years Steven.

We've acquired about $300 million, a year, and we monetize about $300 million a year.

And I think our assumptions would be on a go forward basis that whatever that dollar amount is.

We're going to continue to be able to do that.

Yes, I think keeping that the other color I would add is the difference is.

You see what's on our books the land Thats on our books, which has been in the.

Hi, $200 to mid 300 billions and we've got land under contract we've got land under options, that's not on the books, yet and in a perfect world, we're entitling that and putting that into production in the same quarter. So it actually never hits the books and Thats, what Steve's guys have gotten really good at is efficiently managing that.

Land portfolio and so as we look out over the next over the next few years, we look at what we've got under control.

Entitled and option plus what we have.

And we're comfortable we can maintain that level of development.

Got it.

In your supplemental and the land bank is actually I mean, you guys control about 300 acre one and then there are about 575 acres.

That are under option.

I think all in Columbus, Ohio.

No.

And obviously, you're not going to do.

All clinical Io construction going forward so.

How does that.

So how does it get you into.

Youre going to King of Ohio.

So how does that configure into your <unk>.

<unk> thought.

Especially given that.

A lot of the acreage is in Columbus.

Okay.

I think thats, just thats a residual joint venture agreement that we have with the airport authority, where we control an enormous amount of land most of the land that I'm, referring to are covered land plays both short and long term and land that we have under contract that we're working through the entitlement zoning design process.

Yes.

Okay. Thanks, Dominic postal markets Keven that other land that Jim just mentioned.

Okay. Thank you.

Okay.

Next go to the line of Mike Mueller. Please go ahead.

Yes, just had a quick one at this point it looks like in the quarter you had a small restructuring charge I'm just curious what that related to.

Yes, Mike.

We basically.

Move some folks around to better align our construction group construction and development group.

We're doing development now so.

Our development now is predominantly.

In those coastal markets and then some of the other.

Tier one markets and we had a lot of people that weren't sitting in the right place quite honestly. So that's what those charges were.

Got it okay that was it thanks.

Yep.

And as a reminder, ladies and gentlemen, if you do wish to ask a question. Please press one then zero on your Touchtone phone.

And it goes to the line of Bill Crow. Please go ahead.

Hey, good afternoon. Thanks.

It's pretty clear the tenants are price takers at this point.

What are the Kenneth reps asking for.

From from base rent bumps.

Looking for is a win for the tenants.

Trying to negotiate anything thats non monetary that.

Go back.

And tell the tenant.

Something.

Mercy, that's what they're asking for.

[laughter] Kitting Bill.

Look good brokers are our best friends, because they educate their clients on what the state of the market is so.

When Steve talks about engaging customers 12 to 24 months in advance they come to the table with a very good understanding what the landscape is how little opportunities. There are in the market in terms of other vacant space what the cost of new construction is what the cost of relocation is so.

As you've seen from us and I am sure from some of our peers.

You've seen rents continue to decline concessions are at very very low levels.

Obviously, we're still paying commissions in new because we've got what I would call very normal.

Amounts of Ti to build out space, but the days of free rent the days of outside tenants finish as an enticement for above standard improvements amortization of tentative tenant improvements.

Material handling equipment, racking and things like that that's all gone by the wayside.

Okay.

Alright I appreciate it thank you.

And at this time I have no further questions in queue.

Thanks, Sean we'd like to thank everyone for joining the call today.

We look forward to engaging with many of you at the NAREIT conference in a few weeks and into the early part of next year. Operator, you may disconnect your lines.

Thank you, ladies and gentlemen that will conclude our conference for today. Thank for your participation for using AT&T event services you may now disconnect.

We're sorry your conferences ending now please hang up.

[music].

How much of your host Ron Hubbard, Vice President of Investor Relations. Please go ahead.

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

Joining me today are Jim Connor, Chairman and CEO, Mark Downey, Chief Financial Officer, Steve Schnur, Chief operating Officer, and Nick Anthony Chief Investment Officer.

Before we make our prepared remarks, let me remind you that certain statements made during this conference call maybe 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 have.

For each of 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 28, 2021, and we assume no obligation to update or revise any forward looking statements.

A reconciliation to GAAP of the 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 SEC reports.

And an audio webcast of this call in the Investor Relations section as well now.

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

Thank you Ron and good afternoon everybody.

<unk> in our business continue to be the best we've ever seen I will share a few highlights for the quarter and then turn it over to the rest of the team.

During the quarter, we began roughly $350 million of new developments with expected strong value creation at Irr's and our and we raised our full year guidance on starts once again cap.

Cap rate compression in rent growth continued to outpace material cost increases, allowing us to drive improved margins.

The margins on our development pipeline are now over 60% and our core portfolio achieved record rent growth of 22% on a cash basis from second generation leasing activity.

Based on these results and our optimism about the balance of the year, we have raised the dividend by almost 10% Mark will go over these changes in detail momentarily now let me turn it over to Steve Steve to cover the real estate operations in more detail.

This was more than enough to offset the new supply is completions came in at about 79 million square feet is positive net absorption of our deliveries for the quarter reduced vacancy down to three 6% setting yet another record low.

The strong fundamentals increased nationwide asking rents during the third quarter by 10% compared to the previous year.

CBRE now projects demand for the full year in the mid 300 million square foot range and likely to break the all time 2016 record of 327 million square feet.

Completions for the year projected to be about 270 million square feet.

National asking rents for the full year expected to be in the mid teens with some markets like Northern New Jersey, and southern California are likely to see increases of 30% to 35%.

The reaction to supply chain bottlenecks continues to be in the early stages of that.

Boom for our sector with CBRE, reaffirming roughly $1 2 billion square feet of projected aggregate demand over the next five years.

Increasing inventory levels safety stock consumer spending and online shopping trends are driving much of this demand.

Demand by occupy occupier type remains broad based with E Commerce and logistics services companies continuing to make up roughly 60% of our activity with the E Commerce contribution about 10% lower compared to 2020 and the three PL contribution about 10% higher than this time last year.

It is also noteworthy that Amazon share of demand. This year is about 10% of overall total demand compared to 18% of demand in 2020.

Turning to our own portfolio, we executed a very strong quarter by signing $9 5 million square feet of leases the strong lease activity for the quarter resulted in continued growth in rents within our portfolio as we as we reported 35% on a GAAP basis and 22% cash.

Notably with only 25% of our transactions occurring in coastal tier one markets.

We now project, our mark to market.

On a GAAP basis within our portfolio to be 28%.

We started 349 $349 million of new development totaling two 2 million square feet that consisted of six speculative projects and two build to suits in the quarter.

80% of this volume is in our coastal tier one markets.