Q4 2021 Duke Realty Corp Earnings Call

January 27, 2022

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. Later, we'll have a question and answer session and instructions will be given at that time, you should require assistance during todays call. Please press Star then zero as a reminder today.

This call is being recorded actually the concept of our host Ron Hubbard. Please go ahead.

Thank you good afternoon, everyone and welcome to our fourth quarter and year end earnings call.

Joining me today are Jim Connor, Chairman and CEO .

Mark Dineen, Chief Financial Officer, Nick Anthony Chief Investment Officer, and Steve Schnur, Chief operating 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.

We would refer you to our 10-K or 10-Q that we have on file with the SEC and the Companys. Other SEC filings all forward looking statements speak only as of today January 27, 2022, 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.

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 of our website now for our prepared statement I'll turn it over.

To Jim Connor.

Well, thanks, Rob and good afternoon, everyone. Let me start by saying that 2021 was another outstanding year for Duke Realty, we met or exceeded all of our 2021 goals, including our revised guidance throughout the year. We also capped off the year with an excellent fourth quarter from an operational and financial perspective that sets.

Thats up for a great 2022, and beyond so let me recap a couple of highlights from our outstanding year.

We signed over 33 million square foot of leases, which is at all times for US we concluded the year with our in service portfolio at 98, 1% lease a company record and particularly impressive as it includes the delivery of seven 7 million square feet of development projects in 2021.

We renewed 75% of our leases or 90%. When you include immediate back bills, we obtained 35% GAAP rent growth of 19% cash rent growth on second Gen or at least second generation leases for the fourth year, respectively. Both all time records for us.

Same property NOI on a cash basis at five 3%.

We placed $1 billion of developments in service that were originally 39% leased at the start dates but are now 90% lease with a value creation of 69%.

We commenced one 4 billion in new developments across 33 projects, which was another all time record 61% of those projects were in coastal tier one markets.

We completed $1 $1 billion of property dispositions and $542 million of acquisitions.

Raised $950 million in green bonds, with 10 year terms and an average coupon of 2%.

And we increased our annual common dividend by eight 9% in.

And finally, we've continued to run our company in the most responsible manner with our ESG culture, and our numerous corporate responsibility achievements, including our significant carbon neutrality goals, which were announced in November .

So now let me turn it over to Steve to cover operations for the quarter and touch on some market fundamentals.

Thanks, Jim I'll first touch on overall market fundamentals fourth quarter demand was exceptional.

Logistics sector with a 122 million square feet of absorption about similar to last quarter and the third highest quarter on record.

Demand exceeded supply by about 40 million square feet, which dropped national vacancy rates to an all time record low of three 2%, which is over 300 basis points below long term historical averages.

For the full year demand was 433 million square feet compared to completions of 268 million feet.

Lease activity was robust in nearly all user groups with E Commerce third party logistics and retail representing the largest segments in the market as a whole as well as in our own portfolio.

National asking rental rates rose again in the fourth quarter up 11% over this time last year.

We see this trend continuing into 2022 with nationwide market rent growth on average expected to be around 10%.

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

CBRE recently reaffirmed the just in case inventory restocking strategy will be a significant contributor to the $1 4 billion square feet of projected aggregate demand over the next five years.

In addition, consumer spending growth and the continued secular growth in online shopping are driving much of this demand.

For the current year, we expect the demand and supply will be mostly in balance even as large as the under construction pipeline currently is.

I'll remind everyone on this call we estimated about 65% of the current supply pipeline is not located in our submarkets.

Turning to our own portfolio results, we executed a very strong quarter by signing $8 9 million square feet of leases with an average transaction size of 122000 feet.

Rent growth for the fourth quarter leasing was again very strong at 21% cash and 41% GAAP.

We expect growth in brands on second generation leasing for the foreseeable future to be very strong.

And our portfolio, we estimate our lease mark to market to be 39%.

Turning to development, we had a tremendous quarter starts as Jim mentioned breaking ground on nine projects totaling $466 million in costs.

80% of the fourth quarter development starts were in coastal tier one markets and six of the nine projects, where redevelopments of existing sites structures.

Our development pipeline at year end totaled $1 4 billion.

<unk> is 48% pre leased with active prospects to bring this number even higher in the near term.

We expect to generate value creation margins in the 65% to 70% range of these projects.

Looking forward our prospect list for new development starts was very strong in our land balance at year end totaled $475 million with an additional $173 million of covered land plays.

Our current landholdings are above our level of the last few years and consistent with what we've recently communicated as much in the land acquired late in 'twenty, one has been under contract for several quarters.

94% of our land balances located in coastal tier one markets.

We own or control land that can support roughly $1 billion of annual starts for the next four years as long as the demand picture remains robust, which we believe it will.

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

Our favorable land value will continue to support high development margins and very good long term IRR. We believe we are very well positioned to continue to lead the logistics sector in growth through new development and with that I'll turn it over to Nick Anthony to cover acquisition and disposition activity for the quarter.

Thanks, Steve during the quarter, we closed on $206 million 1 billion in acquisitions, most notably a 470000 square foot property in northern New Jersey in an off market transaction as well as three facilities in southern California, totaling 134000 square feet.

As noted on the last call early in the fourth quarter. We sold our recently completed project in Columbus, Ohio, which was a 100% leased to Amazon carrying proceeds of $80 million.

I would point out that this transaction is placed under contract in April of 2021 as part of our for takeout.

For the full year, our capital recycling encompassed $1 1 billion of asset sales and $542 million of acquisitions combined with the development previously mentioned by Steve This activity moves our coastal tier one exposure to 43% of NOI and overall tier one exposure to 68% of NOI.

Also earlier this month, we closed on the third tranche of assets to our joint venture with CBRE Global partners for which our share of the proceeds with $269 million.

The other the other dispositions expected. This year are primarily individual assets across multiple markets and are projected to close primarily in the second and third quarters of 2022.

I'll now turn it over to Mark to cover our earnings results and balance sheet activities. Thanks, Nick core <unk> for the quarter was <unk> 44 per share compared to core up a full of <unk> 46 per share in the third quarter and <unk> 41 per share reported for the fourth quarter of 2020 core <unk> decreased slightly from the third quarter.

<unk> of 'twenty, one as we executed a significant volume of asset dispositions during the third quarter did not fully redeploy the proceeds until late in the fourth quarter core <unk> was $1 73 per share for the full year 'twenty, one compared to $1 52 per share for 2020, which represented a 13, 8%.

Increase.

<unk> as defined by NAREIT <unk> was $1 65 per share for the full year 'twenty, one compared to $1 40 per share for 2020.

<unk> totaled $589 million for the full year, 'twenty, one compared to $517 million in 2020 and $148 million for the fourth quarter of 'twenty one.

Our annual results represented a 11, 6% increase to <unk> on a share adjusted basis compared to 2020.

Same property NOI growth on a cash basis for the three months and 12 months ended 12 31, 'twenty one was five 2% five 3% respectively.

I would like to point out that we continue to generate substantial NOI and <unk> growth outside of our same property pool as net operating income from non same store properties was 17, 6% of total net operating income for the quarter St.

Same property NOI growth on a net effective basis was three 9% for the fourth quarter and four 5% for the full year 'twenty one.

As Nick mentioned, we closed on the third tranche of our contribution to our JV with CBRE Global earlier. This month, we will use the proceeds of this contribution along with mortgage financing proceeds received from the JV, both of which totaled just over $300 million.

To fund the redemption next month of our $300 million.

375% unsecured notes, which were originally scheduled to mature in December of 2024. After this transaction closes we will have no significant debt maturities until 2026 and ample liquidity to fund our growth looking into 2022 yesterday, we announced a range for 2022 core <unk>.

Share of $1 87 to $1 93 per share with a midpoint of $1 90, representing a nine 8% increase over 'twenty. One results. We also announced growth in <unk> on a share adjusted basis to range between eight 4% and 12, 3% with the midpoint of 10, 4%.

Same property NOI growth on a cash basis is projected in the range of five 4% to six 2%. In addition to realizing a full year of the impact of rental rate growth on leases. We executed in 2021, we continue to expect strong rental rate increases in 2022, while on the surface. It seems we have abnormally low.

Lease explorations, we typically really significantly more that is contractually set to roll with some pull forward of future explorations for instance, a year ago. Our exploration schedule said, we had 7% expiring in 2021, but we actually rolled over 12% and in fact in this environment, our customers and their brokers.

Have been actively approaching us for early renewals, we expect proceeds from building dispositions in the range of 600 million to $800 million, while we've targeted assets with long lease terms and low annual rental escalations in our disposition strategy for the year development starts are projected in a range of $1 2 billion to $1 4 billion with a continuing TARP.

To maintain the pipeline at a healthy level of pre leasing are 22 development plans include a significant component of speculative projects in coastal tier one markets, which we have consistently demonstrated a track record of quickly leasing and which we believe will allow us to take advantage of the continued rental rate increases in those markets more.

Vic assumptions and components of our 'twenty two guidance are available in the 2020 to a range of estimates document on the Investor Relations website now I will turn it back over to Jim for a few final comments.

Thank you Mark.

In closing I would like to reiterate what a great year 2021 was for Duke Realty as I noted at the outset, we exceeded all of our beginning of year expectations. As we look ahead into 2022 all of the demand drivers remain exceptionally strong.

<unk> is expected to roughly equal supply this year, which bodes well with our continued record low vacancy strong pricing power to drive same property NOI growth.

We will continue to see the added value created by our dominant development platform.

As Mark noted the midpoint of our <unk> and <unk> guidance is roughly 10% over 2021, which is a level of growth that we believe we should be able to achieve on a consistent basis for the foreseeable future with our platform and the current market market fundamentals.

Finally, I'd be remiss if I didn't thank all of my colleagues at Duke Realty for all their hard work and dedication that allowed us to achieve a level of success. We have I also want to thank all of our investors for their continued.

And the recognition of our good stewardship of their invested capital.

Now I will open it up for questions I would ask that you limit your questions to one or perhaps two short questions and of course, you are always welcome to get back in the queue and remember the prompt for Q&A is one zero.

Operator, we will now take questions.

Thank you.

And then just another reminder, if you do have a question for todays conference. Please press. One then zero on your Touchtone phone. Our first question will come from the line of Nik You'll recall. Please go ahead.

Thanks, Hi, everyone in terms of the development starts maybe you can just give us a feel for what's driving the range of starts this year, which is actually a bit lower than last year what is it.

What is the thought process, there and what would be a situation, where you would get even more comfortable increasing your development stores.

Yeah.

I'll start off and then Steve can give you some color.

I would say, it's two things.

We've always had a solid.

Build to suit pipeline and I think if we can continue.

Continue to do a number of those large build to suits like we have I would say.

<unk> work towards the high end of our guidance and the other thing ties back to our leasing if we can continue to lease at the levels. We have in 2001, I think we can accelerate speculative development as well and I think that would push us up to the high end or potentially gives us reason to raise guidance at or Steve. If you have any additional color you want to add.

Yes, Nick I would just say I mean, you look back at last year.

Our budget going into the year was in the $850 million range, we did $1 $1 billion.

We had a very strong year in 'twenty, one I think heading into 'twenty, two we feel very good about our prospects.

Part of it is getting the right sites entitled and getting them started so.

The demand picture is strong.

It's more about being able to find the opportunities to get them started.

Okay. Thanks, So I just just to follow up on the development pipeline and the margin that you are citing.

Which went up versus last quarter cap rates down, but yields compressing a bit on.

Development New starts I mean, how should we just think about that dynamic going forward about where cap rates could move where development yields are penciling out over the next year.

Okay.

Hey, Nate this is Nick.

It really.

I think we continue to see very strong rent growth.

In the markets that we're focused on and I think as long as we can continue to see that rent growth that will continue to help us achieve the above normal margins that we've been achieving historically, yes, I would just point out and makes it a little bit of the decrease in the stabilized yield in the pipeline from last quarter. This quarter, it's really a market mix situation we place.

Some assets.

Assets in service that were in lower.

Lower barrier markets with higher yields and replace that with new developments in more coastal markets.

The initial yield may be a little lower but it's still a market mix the value that we're creating actually went up and I would tell you on cap rates I mean, even though we still have not seen.

Any.

Any increase.

Increase in cap rates, even with interest rates going up there is still very strong investor demand out there.

And we expect that to continue for the foreseeable future.

Okay. Thanks, Thanks, guys I appreciate it.

Our next question then will come from the line of Jamie Feldman. Please go ahead.

Great. Thank you I guess I know you touched on it a little bit but can.

Can you just talk about more about the kind of big picture supply story.

You see some of the projections coming out of the brokerage firms in four of 500 million square foot range for the U S. This year.

Just how should we be thinking about the risk of <unk>.

Cycle, ending early or just.

The exposure in your markets or just thinking about the largest pieces of that.

Jamie we see the same data that you do and we've been hearing the same stories for the last several years and I think.

There is a pretty substantial disconnect to this projected supply number and actual annual completions and.

I'm sure. The Devil is in the detail on how some people count in terms of announced projects as opposed to actually really started projects, but I think in today's world the rising cost of <unk>.

Building materials, the rising cost of land the.

The increased level of difficulty to get sites are titled it out of the ground.

Placing it.

You will an artificial damper on new supply so while everybody is saying supply and demand will be equal.

<unk> be surprised if we were here a year from now.

<unk> had another year like this where demand exceeded supply simply for those reasons I cited earlier.

Sure.

Okay, and then we keep hearing about for supply we're seeing are that that's being built and some of it.

Our tertiary submarkets.

What's your thought on that being competitive or putting pressure on rents in your portfolio or for your development projects.

You're seeing a real difference in pricing.

Different submarkets in the same market.

No Jamie.

Okay I'll start.

I would tell you.

We're not seeing we're not seeing big variations between Submarkets.

And the markets were in I mean, when you look at you look at the under construction pipeline as I mentioned that 65% of it is not in either markets or Submarkets, we operate in.

Phoenix is an area has gotten a lot of construction going on right now we're not in that market.

Greenville right.

<unk> San Antonio a lot of these markets.

We don't want we don't own property in that.

How big supply numbers.

In terms of the markets that we own property in 19 markets were in I would say Houston is probably the one that we've talked about on a number of these calls that continues.

To be a little soft and not one that we will we will be starting to building in anytime soon.

I guess, even within Europe . The markets you are in where there is supply you think rents are kind of constant across submarkets.

Yes, very great you've got you've got jumping all over but you've got.

I mean in markets. We're in we're seeing strong rental growth and then obviously, we've put up record numbers for ourselves this year.

I think we went into this year into 'twenty, one thinking that market rent growth in the U S was going to be in that.

Mid single digits, maybe pushing double digits, and we were wrong again and it ended at 11% and I think I think.

You've set up to do the same thing in 'twenty two.

Okay alright, thank you.

Our next question will come from the line of Keybanc Kim. Please go ahead.

Thanks, and congrats to another great year.

Wanted to stick with the development topic.

<unk>.

Total value Notching down just a little bit, but if you think about the inflation that we've seen it probably implies that the square footage or a number of projects that you are actually projected to start on a lower than the dollar value. So can you just talk about that part of it and what yields are you expecting for 2020.

Go ahead, Steve.

Sure Kevin.

<unk>.

It does depend on where we end up in that range right.

I think it's safe to say that we will we will do somewhere between.

8 million to 10 million square feet of new development starts.

As Jeff Martin alluded to early on part of it is that the demand picture looks really good for us.

We've got a number of large projects, we're working on but.

It depends on some of that pre leasing and how much risk do you want to take on and in terms of in terms of returns or our stabilized returns.

Again, I think we'll be a little dependent on market mix, but assuming we're consistent with.

60% to 75% and our high barrier markets.

I think the returns in the low fives stabilized is probably a reasonable expectation and I think our value creations.

Is there any where cap rates are still going to be.

Healthy as they are today.

Yeah, and the only other thing I would point out Kevin is youre right on I mean, I think if you do theoretically the same dollar value of development. This year that you did last year.

On a cost per square foot basis, it's going up right. So you are probably developing less square feet because costs are going up but part of it is also market mix once again right.

Whereas do smaller buildings per se per dollar per square foot in these coastal markets, which is where more of our development continues to take place.

Gotcha.

Quick topic, where do you think we are in terms of the infrastructure build out to support E Commerce growth.

And I'm curious if you think 2021 wasn't any kind of pull forward demand year and if the <unk>.

Next couple of years look a little bit more normalized.

Well look.

Let me, let me answer both of those.

We've been asked a number of times that a number of different ways about how the infrastructure Bill and infrastructure spending is going to help.

I've told people that that I think you have to exercise reasonable expectations.

The Best example, I can get if you remember we talked about the expansion of the Panama Canal for years.

<unk>.

It took many years for it to get done and complete and fully operational before we started to see the effect. So I think the legislation is still less than what probably 90 or 120 days old.

You got to get projects approved and funded it started before youre going to see that so I think it'll be several years before we will see the full impact of that.

So.

I think that's the that was the first question what was the second part of your question Kevin.

So I was actually talking more about the warehouse network build out for e-commerce not infrastructure Bill.

And that's where we are in terms of earnings and if you think 'twenty 'twenty. One was it got pulled forward year aware, maybe 'twenty two 'twenty three looks a little bit more normalized.

Well I would tell you I think we believe 'twenty was a pull forward year and I think if you look at some of the big players in E Commerce.

And the traditional retailers that have moved.

Very strong into e-commerce .

Their numbers for 'twenty, one were down over 20.

And I think.

These are somewhat more normalized years that we're in but I think everybody believes we're still in the early innings in terms of the development of fulfillment centers and e-commerce supply chain last mile facilities.

For e-commerce retailer as well as our traditional customers like Fedex and UBS continue to grow dramatically. So I think we're in the early innings I think youll continue to see some ups and downs with the.

The different aspects of business, but I think we're going to continue to see that sector grow at a very healthy rate.

Okay. Thank you.

Our next question then will come from the line of Dave Rodgers. Please go ahead.

Yes, good afternoon everybody.

Obviously, the financial guidance you gave is pretty bullish for the year ahead, and I think largely expected by the street it seems like and maybe weave all touched on it a little bit the investment guidance is much more conservative lower acquisitions lower dispositions lower development starts and then kind of where you were last year, but I guess I wanted to understand that more and even Mark's comments about using asset sales to pay off debt.

As opposed to kind of growing and shrinking the balance sheet versus growing at so I guess I want to understand or is there something that you're worried about do you have the ability to take development starts to $172 billion with the combination of land entitlements labor.

Steel or are there some natural barriers right now that you are coming up against in terms of being able to invest more capital more aggressively given the low vacancy rates.

Well, let me start off and then others can chime in.

No were not we don't have any barriers at all and I think if you look at where we started the year with guidance in 2021 of $850 million and where we ended up the year.

I think those possibilities exist as I said earlier about the development pipeline.

It's a function of some of the bigger build to suits and how many of those we signed during the year that would push up towards the higher end of guidance or to exceed our initial guidance much like we did last year and then its continued leasing volume and the ability for us to accelerate.

More speculative development and most of those markets, we've ramped up our land holdings to support.

Significantly larger development pipeline going forward.

And I think we've indicated that we're going to continue to be actively buying land. So no. We're not there's no hidden message we're not managing I think this is probably pretty consistent.

Good strong, but prudent guidance and.

I hope to have the opportunity to tell you over the course of 2022 that we intend to raise guidance a few times yes.

Yes, David I would just add to your specific point on asset sales to pay the debt off that I did refer to that.

It's really a temporary thing it's not like we went out and sold assets to pay back debt or buy back debt early that was really just to keep from having a bunch of cash sitting on our balance sheet here in the first quarter of the way we look at that.

It just frees up our balance sheet to do even more debt now to fund this growth that Jim just went through without deteriorating our balance sheet. Any so that was really more just a temporary use of cash and then lastly, Dave I would add on the acquisition side I think last year, we had a midpoint guidance of about $400 million. We did we did like $5 30 to $5 40.

Acquisitions are tough it depends on what the opportunities are and frankly most of the majority of our growth is going to be through development, because we like the risk adjusted returns there.

Other than the acquisitions.

Great and then Nick maybe just staying with you for a follow up on the cap rates for acquisitions and dispositions, realizing they're relatively small, but it's about 120 basis point spread between acquisitions and dispositions last year. There was a lot of kind of ins and outs and it seems like this year might have some SKU as well, but can you talk about that spread in 2022.

And maybe kind of what that normalized that looks like ex Amazon.

Yes, I think I think those spreads.

We will continue to be about the same what I would point out though is the total returns or the IRR.

Spreads have expanded in the lab.

Last 18 months and for 2021, we calculate the spread at about 250 bps that are acquisition IRR as were 250 bps, that's higher than our disposition IRR.

Great. That's helpful. Thank you.

Our next question will come from the line of Ken Lin Burrows. Please go ahead.

Hi, there I guess good afternoon, I guess as you guys look at occupancy yet.

Ended the year, almost 90% occupied and it seems like you generally expect that to stay flat or even increase at the mid or high end of your guidance. So just wondering if you can give some current thoughts on kind of ideal occupancy and recognize that not necessarily the key metric about how occupancy that high. It makes me comfortable that your R&D getting the strongest rent growth.

Sure.

Well.

Well I'll start Caitlin.

Quite frankly, I like 100% occupancy Jim's always talking about 96, or 97, and having some room, but as long as we're getting the best rents. We can get why Wouldnt you want a lot of occupancy too.

I think I'd just go back and I look at you look at our rent growth that we posted.

And I think we'll be at or near the top of our peer group. So as long as we're posting rent growth numbers that are at or near the top of our rent growth peer group I'm, sorry, I'm, having a high occupancy levels is a good thing.

From a same property perspective, specifically and we don't really give guidance on same property occupancy, but I could actually see that even pick up a little bit not a lot, but maybe 20% to 30 basis points from 'twenty one to 'twenty two.

Being that kind of low to mid 98% range. So that's really what we're projecting we don't have a lot of explorations like I pointed out in our.

<unk> remarks, but we will likely roll more of our portfolio and what's expiring, but that doesn't do anything the occupancy rate at just keeping tenants in there and it's getting to getting to that rent stream even quicker.

Got it and maybe just.

Quick follow up on kind of leasing trends I know last quarter, you guys gave some impressive stats on how lease.

Lease properties.

Properties, where when they went into service at 90%.

Thanks Lisa.

19 of your respective elements had been under two months from having been placed in service. So just wondering.

It's only been a quarter. So they don't move that drastically that quickly, but wondering if you have any reason to believe that that lease up timing could begin to take longer or if that's it.

No.

I would say as we sit here today, it's still we're pretty much right on the timing I guess that we have been at the last 12 months like if you look for example at the deliveries this quarter. They were 71% leased when they went in service, but they were actually 39% leased when we started those projects. So we almost kind of almost doubled the.

And see if you will before they were even placed in service. So we still continue especially in markets like.

Southern Cal and Northern New Jersey.

At least most of these projects that before they even go on service. So when those markets Youre looking at zero to two to three months of lease up time on average and then in the other markets. It's maybe six to nine months. So we continually beat our underwriting which is 12 months and I would say as we sit here today looking at our pipeline that we just started and what's about to come in.

What we plan on starting in the next couple of quarters.

It is going to look very similar.

Yes, the other metrics that we point to is we've got in the portfolio a little under six 5 million square feet of vacant space, 75% of which is not in service yet.

I think that speaks to the strength of the leasing activity that steves teams are seeing all across the country.

And the opportunities for continued outperformance in that area.

Yes.

Got it thank you.

Our next question will come from the line of Ronald Camden. Please go ahead.

Hey, two quick ones for me congrats on a great year, just sticking to sort of the previous question on the same store.

NOI guidance.

When I think about sort of the rent growth numbers that youre posting obviously the rent bumps are what they are potentially some occupancy tailwind.

And when you think about why not higher is it mostly because there is fewer leases rolling as you mentioned or is there anything else.

With free rent or anything else, we should be aware of that that may be.

Is keeping that number a little bit lower.

It's really roll I mean.

If you look at what I call deal quality.

The rent growth we're getting.

The overall rates were getting on deals I'll put our deals up against anybody I think our deal quality is as good or better than anybody any of our peers out there. We do have less role I mean, thats a fact.

So you got to look at on a risk adjusted return, we're very happy with the guidance, we put out but the other thing I would just tell you on role.

Like I mentioned my prepared remarks for 'twenty. One we were supposed to have 7% of our leases roll we actually enrolled 12, if you look at 'twenty two.

Thats in our supplemental we're showing 5% roll when we're all sudden done it'll probably be closer to 10% that will roll. So if you take that you really need to take those two years and average them together because you got to remember a lot of the 22 same property growth will come from the 21 leases, we sign and only part of 'twenty two will come from the 22 leases we sign some of that will.

23, so if you averaged 21 and 'twenty two together were going to call. It rose 11% of our portfolio over that two year period at a 20% cash rent growth number that we've been posting that's a little over 2% you had the rent bumps to that that are embedded in our portfolio that gets you up close to 5% our guidance is close to <unk>.

Because the difference would be.

Occupancy free rent things like that so hopefully that kind of watch it through the other thing I would add Rob is the.

<unk> for US is what leases, we could get our hands on Earth quite candidly.

And at this point early in the year.

I don't think Steve guys across the country have a real good idea of the total amount of leases will be able to pull forward and which ones. They are.

Because it's early in the year and we're just in.

Discovery dialogue with a lot of those so depending how many we can pull forward.

Well I think really dictate.

How close to the upper end, we can get it.

And then the last point I would make circling back to.

I think it was Dave Rogers question, Nick on dispositions, and maybe being a little higher.

The assets that we have targeted for disposition are actually quite frankly that we think we've really maximized the value on them. There are some of our.

Assets that had longer term leases and it quite frankly, lower rent bumps and we think we can get very attractive cap rates on those assets. So we can sell those where we think we've maximized the.

The value and it really just helps our same property pool looking forward more into 'twenty three those kind of items will be more of an impact on 'twenty three.

But we continue to get those lower growth assets out of our portfolio and replace them with higher growth assets.

Great.

And then just if I could sneak in a quick one.

Just on the wage.

Wage expenses.

Maybe can you talk about sort of what youre seeing on the ground what sort of the construction and so forth what youre hearing from tenants anything any number you can throw around it is it up 7%, 8% year over year would be would be really helpful. Thank you.

Was that question on wages for warehouse workers or construction cost.

For warehouse workers Yep. Thank you.

Okay.

I think it varies by region, but you.

Probably seen.

Probably seen a.

10% to 20% increase in some wages dependent on areas.

I mean look our customers I think Caitlin I ask a question earlier about <unk>.

These conversations with tenants in.

This is the conversation that Jim has with the operating teams quite often which is are we are we pushing hard enough and our customers are under a lot of.

Pressure from.

A bunch of different points of their of their business right between transportation cost or are up significantly.

Ages are up.

Rent continues to be a relatively small part of the overall logistics costs.

So.

They are facing facing quite a few.

Inflationary challenges out there, but rents rent continues to be a small part of it.

Thank you.

Our next question will come from the line of Emmanuel Korchman. Please go ahead.

Hey, guys.

This is one for on a combination of I guess, Steve and Mark you spoke about the 2021.

Pullback or not pull back but the.

Early renewals and then 2022 a couple of questions. When you sign leases early so the 2022 leases that you signed that were not expiring did those rent bumps take place immediately Mark you spoke about the benefits the same store NOI, but through the new due to new rents become effective at the end of the lease or mid lease because youre doing them early.

It varies Manny generally they don't take effect until the the current lease ends.

There are some exceptions to that but generally they don't place take place until the new lease.

Currently <unk>.

Yes, I would agree with that.

The one exception that Manny is some of these conversations.

Let's take place around the tenants' needs right, whether they need something done to the building.

Some improvements a lot of times, we'll redo the lease at that point in time, but as Mark said I'd say the.

75% of them or have to do with.

Natural exploration.

And the only other point I would make is these are not just to be clear.

We do a few but these are not generally leases that were expected to roll in two or three years from now. These are generally six to nine months early.

Hey, Jim Mike right, but Mark I guess the point I'm, making is you talk about the big benefit too.

Cash.

Cash flow from doing them early.

But from a model perspective from a cash flow perspective, the fact that you've signed them early in their in your leasing stats. It doesn't really impact cash flows right. So your 2022 at this point, it's still going to your natural.

Lease exploration in 2022 is going to be about the same because you've just done them six to nine months early right from a cash flow perspective.

Well youre exactly right, but that's why I said, you really need to average a couple of years together because the impact what I was trying to say is the impact of a lot of the leases we signed in 'twenty one hit US now in 'twenty. Two so that's why you need to really take a couple of years and average them together you are exactly right.

And then I think you mentioned, 20% cash rental rate growth. When we do that average is that is there.

That implying.

Can we use that to imply what your 2022 rent growth is going to be or do you want to guide us to sort of what those numbers fallout.

What we would say is we expect as we sit here today, we expect 'twenty twos rent growth numbers to look very similar to <unk>, one which is call. It in that mid to high 30% on a GAAP basis in high teens to low 20 on cash so yes, it's right in that area.

And I think Michael I had a follow up.

Hey, Jim its bilerman.

Just a question of if you think about longer term strategic planning.

Anything changed in your mind or at the board level about either global expansion.

Maybe diving deeper into the asset management business, taking advantage of all the significant capitals out there obviously you did the CBRE.

Venture.

Going deeper and then thinking about helping your tenants you look at what <unk> is doing in the essentials business does any of that.

Start to rise up higher in your strategic thinking.

Yes.

Im sorry, Michael those are all topics that are consistently.

Debated in our strategic planning efforts and at the board effort.

And.

<unk>.

We have not we're not prepared to announce any of those.

But theyre all in the mix and they're all certainly things that we're talking about today.

They're all things that given our size and scale.

Our opportunities for us.

So it sounds like.

I don't know if youre able to rank those three things global.

Asset management and essentials.

Each one of them will be closer to potentially going forward. So I think your comments in the past have been you want to be a U S focused company. That's what distinguishes you relative to the peer set.

You don't want to become a massive asset management asset manager you want us to do small direct ventures, when the time needs to not put pressure on you to sort of fill those buckets.

And then the last one being essential seems like the most logical one but I don't want to put words in your mouth.

And I appreciate that.

No.

<unk>.

I think you are correct the opportunity for goods and services for our customers.

Is that is very attractive.

And I think that presents an interesting opportunity back to your original your original two international.

I would say sitting here today.

We think we still have ample opportunity to grow in the U S market and we don't need to push to international to continue to maintain the level of growth.

That we had last year and that we're projecting.

Into the coming years in terms of the asset management side anytime we're doing a joint venture like the CBRE, one or any of the other joint ventures.

We still try and keep the leasing the management and the asset management. So it is a source of fee revenue for us even when we even when we do some of these ventures.

I think it'll be a it'll be a while before we are willing to take a big big step.

That get purely into the third party asset management business.

Okay.

Laura.

Looking forward to it.

Our next.

And that will come from the line of Vince <unk>. Please go ahead.

Hi, good morning.

How are you thinking about selling individual assets versus portfolio deal or are you seeing any differences in pricing, our investor demand for single assets versus larger portfolios.

Vince This is Nick everything is very expensive.

From our perspective.

Specifically on the acquisition side.

We almost exclusively most of the transactions that we're executing on.

Our lightly marketed or off market transactions.

The reality is that most of the portfolio deals are going to be fully marketed.

We look at them, we look at them off market and lightly marketed as well but.

It is very challenging in the acquisition side right now and we Fortunately we've got a good team in place it's leveraging the local development teams to go find some of these.

Interesting infill assets that we can buy at.

Pretty good pretty good yields.

But what about on the sell side I mean do you think there is a portfolio premium today for you know a combination of asset just so many institutions looking to to get into the sector that bill.

Selling single asset kind of get to the same overall execution is a bigger portfolio on the disposition side.

That's always a tricky question, but I would I would answer is yes, there is a portfolio of premium.

On the disposition side, you saw us do that on several transactions last year.

The reality is because investor demand. So strong when you can get a bigger portfolio pull together a lot of times you can sort of leverage that transaction now your buyer pool is going to be smaller. So there's a balancing act there, but a lot of times you can you really push pricing on some of these bigger deals.

It makes sense that's helpful color one more for me.

The book value of your development land Bank is around $650 million, what do you think the market value of that land is today.

To X.

Yes, I think I think that we quoted that in our prepared remarks, two events, we may not have been clear about that.

Yes, we think it's two X what is the book basis.

There's a lot of this land we've just recently put on our balance sheet, there's been under contract in some cases for nine to 12 months in market values have moved quite a bit in nine to 12 months.

Got it thank you.

Yes.

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

Thanks, Good afternoon.

No.

I was looking.

At the same store projection for 2022 at mid 0.58% same store NOI.

That's a different approach than what you've done in past years. In 2020, you started at four and ended the year at five in 2021, you started it four ended the year at five 3%.

Curious if.

Given the fact that occupancy so elevated.

Do you really see that there is upside to the five eight in a similar manner that you've been able to produce in previous years or do you think thats a kind of a full number at this point given all of those inputs and outputs.

Well I would answer it this way rich we're comfortable with the guidance, we gave which does have some.

Some room above the 5858 at the midpoint.

The guidance goes all the way up to what is it six two.

Second number here six too so I would tell you that yes, there is definitely some fuel in the tank so to speak to to get to that six two I'm not prepared to sit here. This early in the year until you were going to get there, but there is a path.

Like a 100% occupied.

I am sorry rich.

Never mind, I said like 105% occupancy.

Okay.

Try it.

So second question for me is you mentioned supply demand being in balance we've heard that a lot in the past few years again in 2022 and that equates to 10% market rent growth, which is a nice.

Positioned to be in but since demand can.

Shock and turn off much faster than supply and.

At what point does that sort of.

That balance.

You nervous in the sense that okay, if supply is running.

X percent above demand in the on the National view do you as a company start to take a more cautious approach to your own development process.

Yes rich.

I think we would but I think here is the fact of the matter U S. Vacancy is three 2% if it goes up a 100 basis points to four two that's where we were in 2019, and we had a pretty good year in 2019.

Not quite as good as 2021, but.

I think anytime you've got U S. Vacancies.

Under 5%, it's a landlord's market and Youll continue to see us be able to put good value creation on the development side, both from build to suit and spec and continue to grow rents.

Right and.

Just a quick quick follow up on the same topic in northern New Jersey, we're seeing a big spike in demand, perhaps no surprise there.

Support.

And as well of course, but is there anything unique going on in northern New Jersey that Youre seeing that is particularly sort of eye popping right now or is there just sort of typical good solid performance.

No.

If you could talk about.

Our demand is pretty much broad based I mean, I can't tell you, there's one phenomenon as some industry that's driving it Steve.

Yes, rich I would just tell you I think.

The biggest thing happening around any of these large population centers as.

I think the whole e-commerce phenomenon is online.

Online.

The economy is translating to our business right. So.

The question earlier about where we are and what inning and I think the Amazon might be and what inning and everybody else is.

Sort of just getting done with warm ups right.

So I think Thats, a big part of it I think northern New Jersey in particular with the demand side is.

The assets that are needed today.

Theyre more modern more modern assets for ecommerce fulfillment.

They don't have that northern New Jersey, and so youre seeing the lack of opportunities for Greenfield development you got a lot we talked about in our remarks six of our nine projects in the fourth quarter redevelopment. So.

That's causing a lot of that demand as well.

And available ready to go opportunity.

All of that I know and in fact, I just saw a particular spike in northern New Jersey that caught my attention, but perhaps we could take it offline.

Thanks, very much guys.

Okay.

Alright, our next speaker they don't come from line of Mike Mueller. Please go ahead.

Hi, just a quick one I'm curious how did the bumps that you achieved with your 2021 leasing compared to the overall portfolio average.

Our portfolio averages up now Mike right at two eight.

And the bumps that we did in 2021 leasing were just over 3%.

So they continue to go north.

Yes.

Got it and then.

I think earlier in the comments talked about rent forecast rent growth forecast is about 10% how does the how does the tier one coastal markets compared to that overall, 10% average.

I think youll see that.

Southern California, Northern California, Northern New Jersey.

Probably three ex that.

The inland Empire is a half a percent vacancy right now I mean, those numbers are astounding.

There is.

The proposals were quoting.

<unk>.

Our activity in our new development pipeline is up significantly and we're quoting proposals today with an end date.

Very near term mandate that we need to get a response on because of how quickly rents are change in in those markets.

Got it okay. Thank you.

Our next question will come from the line of Bill Crow. Please go ahead.

Good afternoon. Thanks.

Are you or should you be pushing up exit cap rates and underwriting given the kind of the advancement of the cycle. The increased longer term supply deliveries increased financing costs et cetera, do you perceive the private market is.

Contemplating pushing up exit cap rates.

This is Nick.

Thanks, So I will tell you when we do our IRR analysis, we do have a 5% annual bump in our projections.

Annually, but thats been pretty consistent over the years. The reality is on our development projects, we price the capital based on comps that are out there right now in the market and yes, I know interest rates have moved up a little bit and that has some correlation to cap rate, but the other side of it is just the overall investor demand for industrial space.

And that still remains quite high and I think that can continue to keep a cap on cap rates going forward.

Alright.

Throw one then from left field here, which is there.

A little bit of attention focused on the industrial sector. When we had the.

The tornado disaster in the Kentucky, and Indiana area and I'm, just wondering whether theres been any.

Our discussions with tenants.

As you think about developing new buildings, whether there is any change to.

So the structure itself.

It's contemplated.

Well I'll tell you, yes, or no look building codes change virtually every month across the country.

We are building state of the art buildings too.

The top curve we deal with.

Earthquake issues and engineering around that we deal with hurricane issues.

<unk>.

Texas and South Florida in eastern Seaboard. So.

That's just the constant evolution of our construction and development people deal with that every day.

Okay.

Right. Thanks, that's it from me.

Our next question comes from the line of Anthony Powell. Please go ahead.

Hi, Good afternoon, just a question on the long term development start outlook. Some of your peers have given either targeted as a percent of enterprise value. We're given outright numbers how should we think about I guess your development starts over the medium to long term given kind of the overall strong environment.

Well I.

I guess I would I would tell you that it's consistent with the <unk> growth numbers that we've given we think we've positioned the company to grow at this level.

For the foreseeable future. So I think you should expect us to continue to have <unk>.

<unk> guidance in the range that we've given this year the levels that we were at last year pre.

Pre pandemic, we were well above a $1 billion once before so.

Think.

We're pretty comfortable committing that we can continue to operate at this level.

Got it thanks, and I have seen more macro macro economists call for predict an inventory glut in first half of this year as people restocked, which could impact against the inventory to sales ratios that you and others quote.

Do you worry about that and if that were to be the case, what are you thinking what to do to medium term demand growth.

Well, our customers would love to get their eyes ratios back up you remember those that number typically operates between one four and one five and that doesn't take into account.

The safety stock or the increased inventory is that a lot of our customers are trying to build up. So you can extrapolate from where the <unk> ratio is today and youre talking about a trillion dollars of additional inventories. So it's going to take us given the supply chain issues that we're all dealing with today, it's going to take us a while to.

Get those levels back up in spite of everything that everybody has tried I think it's.

The supply chain issues are here for well into 2023.

So it is going to take us a while.

Alright, thank you.

Next question.

<unk> will come from the line of <unk> Malhotra. Please go ahead.

Thanks, just two quick ones just.

With all the rent growth that you've outlined where does the Westwood for your mark to market today.

39% on a net effective basis.

In 2029 on a cash basis.

2900 cash okay. Thanks.

And then just where would I am not asking you to give <unk> guidance, but.

If I were to sort of hypothesize and say rents still growing mark to market widening occupancy flat.

Arguably have maybe even more to the release next year.

Why wouldn't same store NOI growth accelerate from current levels next year, where would you see I'm wrong.

Vic you broke up there I didn't quite get that question could you repeat that please.

I was saying that.

If you look next year, you'll have more to leave I know you do a lot of forward leasing, but just optically theres more to lease rent growth is still there. This year, so arguably the spreads versus market like you've just online.

On a cash basis are higher than what you're achieving today. So why would same store NOI growth accelerate next year versus this year.

Where would I be wrong with that statement im not asking for a specific number at this stage.

Okay.

We haven't given that guidance Vic, but I don't see anything wrong with that statement. So it's your statements.

[laughter] scrap.

You asked us about 2023 guidance congratulations.

[laughter].

Well.

So no I was just wondering you just outlined the cash rent.

Book.

To monitor portfolio Mark to market so.

Yes, no we're.

We're not going to we're not going to say you are wrong.

Okay. Thanks, so much guys.

And just as another reminder, if you do have a question. Please press one zero at this time, we're going to go the line of John Kim. Please go ahead.

Thank you.

I was just wondering with your development pipeline, becoming increasingly spec if we.

Think about the length of the stabilization periods extending at all I'm looking at this quarter your completions were 71% leased.

Demand is strong, but I'm just wondering does it take an extra few months to fully stabilize.

Yes, I don't I guess I'll start and I'll tell you I don't I don't know that that's a fair assessment to say it'll be increasingly more spec.

I think.

The fourth quarter was a bit of an anomaly for us.

I do think as these construction material delays.

Impact our business overall.

That may that may be a true statement going forward, but today I don't know that thats necessarily true.

And I don't I don't think our stabilization will change much of our leasing has been strong and our portfolio.

We've been we've been leasing them on average two months after they are put in service.

Given the pipeline today.

Respects.

I wouldn't see that changing for us.

Okay.

Second question is on Amazon and their strategy to own more of the real estate are you seeing a notable notable shift in your markets as far as buying or leasing activity and do you think other retailers in our logistic providers follow suit and decided to go this route.

I would tell you that Amazon continues to be an active user.

Their level of activity has come down a bit.

From what it was in 'twenty and that was down in 'twenty, one and I think in 'twenty, two will be down a little bit more.

But that was a good thing that was the question everyone had for our sector what happens when Amazon slows down a bit and we've answered that I think on the ownership side.

We've seen them more active on acquiring land I heard a stat. The other day. They acquired 3500 acres of land this past year, which was similar to what they had acquired the year before.

I think a lot of that is being done in markets in the areas that we're not necessarily going to compete with them.

Some of these G plus wars that are out in tertiary locations.

But we look we haven't had the Amazon by any of the assets, we've sold with them and they've had an opportunity to do that.

So I don't I can't speak for them, but I don't we haven't seen it compete with us in any market and then in terms of other customers not anything we're hearing.

From anyone trying to trying to follow in any sort of footstep of Amazon.

Okay, great. Thank you.

Yes.

Thank you and at this time, we have no further questions in queue.

Yes.

Thanks, Sean.

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

Look forward to seeing many of you throughout the year at various industry conferences.

Well it is hopefully getting you out to.

Physically, but as all of our regional markets. Thanks again.

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

Okay.

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

[music].

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. Later, we'll 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.

Actually the concept of our host Ron Hubbard. Please go ahead.

Thank you good afternoon, everyone and welcome to our fourth quarter and year end earnings call.

Joining me today are Jim Connor, Chairman and CEO .

Mark Danine, Chief Financial Officer, Nick Anthony Chief Investment Officer, and Steve Schnur, Chief operating 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 January 27 2020.

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.

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 SEC reports and an audio webcast of this call in the Investor Relations section of our website now for our prepared statement I'll turn it off.

Over to Jim Connor.

It's us up for a great 2022, and beyond so let me recap a couple of highlights from our outstanding year.

We signed over 33 million square foot of leases, which is at all times, but for US we concluded the year with our in service portfolio at 98, 1% leased a company record and particularly impressive as it includes the delivery of seven 7 million square feet of development projects in 2021.

We renewed 75% of our leases or 90%. When you include immediate back bills, we obtained 35% GAAP rent growth of 19% cash rent growth on second Gen or at least second generation leases for the full year, respectively. Both all time records for us.

Same property NOI on a cash basis at five 3%.

We placed $1 billion of developments in service that were originally 39% leased at start dates but are now 90% lease with a value creation of 69%.

We commenced one 4 billion in new developments across 33 projects, which was another all time record 61% of those projects were in coastal tier one markets.

We completed $1 $1 billion of property dispositions and $542 million of acquisitions.

$950 million in Green bonds, with 10 year terms and an average coupon of 2%.

And we increased our annual common dividend by eight 9% and.

So now let me turn it over to Steve to cover operations for the quarter and touch on some market fundamentals.

Thanks, Jim I'll first touch on overall market fundamentals fourth quarter demand was exceptional in the logistics sector with a 122 million square feet of absorption about similar to last quarter and the third highest quarter on record.