Q1 2022 Duke Realty Corp Earnings Call

Yeah.

Yeah.

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

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will be given at that time.

If you should require assistance during the call. Please press Star then zero.

And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Mr. Ron Hubbard. Please go ahead Sir.

Uh huh.

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

Good morning me today are Jim Connor, Chairman and CEO .

Mark <unk>, 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 I would like to certain risks and uncertainties.

It could cause actual results to differ materially from expectations.

These risks and other factors and adversely impact our business and future results for more information about those risk factors Warner free 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 April 28 2022.

No obligation to update or revise any forward looking statements.

A reconciliation to GAAP of non-GAAP financial measures that we provide on this call is included in our earnings release and our earnings release and supplemental package were distributed last night after market close.

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

You can also find our earnings release supplemental package FCC report 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.

Thanks, Ron good afternoon, everyone.

The fundamentals of our business continue to be an all time record levels.

We achieved record high occupancy levels in both our stabilized in service in total in service portfolio.

Rent growth on a cash and GAAP basis.

Our development platform and nearly $340 million of development starts.

Our coastal tier one exposure is approaching 50% our portfolio mark to market increased to $48.

All of these factors contributed to raising key components of our 2022 guidance, including over 10% growth in <unk>, 11% growth.

At the mid points now, let me turn it over to Steve to cover some of the market fundamentals and our operations.

Thanks, Jim.

On the metal side in the first quarter demand was 95 million square feet mentioned at five in the last six quarters of demand and the 100 million square foot or greater range.

First quarter deliveries were about 85 million square feet vacancy rates at quarter end remaining near record lows all time at three 1%.

Taking the record low vacancy rate of near 30% coupled with an expected positive demand supply gap again. This year, we have revised our 2022 rent growth forecast for our markets from the 10% to 15% range to the high teens to low 20% range.

On the long term demand side CBRE recently reaffirmed its outlook for one 4 million square feet of demand through 2026.

No areas of negative net absorption through 2032.

Though we are paying close attention the headline data such as inflation fuel and labor cost and a resurgence in bottlenecks occurring in some Asian ports, we have yet to see an impact to demand in our portfolio.

Based on recent dialogues with our customers rfps to lease space and the most recent logistics manager index at record levels. The near term outlook is as strong as it has been in the cycle.

Long term, we believe the secular themes for greater inventory resiliency and E. Commerce are still very much intact and should continue to drive short term and long term demand.

Turning to our own portfolio, we continue to see these positive indicators evidenced by 62 leases executed during the quarter totaling over seven 7 million square feet.

Demand was broad based across categories with a number of leases between 250, and 850000 square feet with customers such as Fedex, Samsung Walgreens Cardinal Health International paper Sealy mattress, some major <unk> on a global ecommerce customer.

Of note, we had only two spaces greater than 100000 square feet and our in service portfolio portfolio available at the end of the first quarter.

And I am happy to have been pleased to report the balls are now leased.

Our lease activity for the quarter combined with the strong fundamentals I discussed led to continued growth in rents on second generation leases.

9% cash and 49% GAAP Ultra records I'd also point out that only 18% of those lease activity was in coastal markets.

Across our entire and service portfolio the portfolio lease Mark to market is now 48% on a GAAP basis. We believe this presents strong visibility for significant rent growth for the foreseeable future.

We finished the quarter with the total in service portfolio 99, 1% leased and stabilized portfolio 99, 4% leased.

Again, all time records.

On the development front, we had a tremendous first quarter starts breaking ground on a speculative projects totaling $339 million in cost.

All of these projects are in well located submarkets our confidence in leasing speculative space continues to be very strong as evidenced of the $5 6 billion square feet of speculative developments placed in service over the past year. Those projects were originally 3% leased at the start and are now 100% leased.

Our development pipeline at quarter end totaled $1 $64 billion.

With 63% allocated to coastal tier one markets and 85% is allocated to overall tier one markets. This pipeline is 52% pre leased and we expect to generate value creation margins over 70%.

Looking forward.

Our pipeline for future development starts is very strong our land balance at quarter end totaled $582 million with an additional $235 million covered land.

93% of this land bank is located in coastal tier one markets.

Coupled with the land options, we have and other land in our operating portfolio.

We can support our current level of annual starts for the next three years and it is also important to note for modeling NAV.

But the market value of the land we own is about two times, our book basis and on average we've only owned this land for about one year.

With the fundamentals I outlined that are best in class local operating teams and our outlook for new development starts as strong as revised this is reflected by our revised guidance up about 20% for our original midpoint I'll now turn it over to Nick Anthony to cover acquisition disposition.

Thanks, Steve I'll start with dispositions.

As noted on the last call earlier this quarter, we contributed to the third tranche of Amazon <unk> to our joint venture with CBRE investment management for which our share of the proceeds was $269 million coupled with the outright sale of another Amazon facility in Tampa dispositions totaled $325 million for the quarter.

As a result, our Amazon exposure was five 7% at the end of the quarter.

Given the strong prices for logistics real estate and particularly for a few of our strategically located assets. We are seeing an increase in reverse inquiries for some of our assets at prices. We previously did not expect did not have in our original plans to sell in 2022 as a result, we have increased our guidance for <unk>.

Positions to a range of $900 million to $1 1 billion.

This will provide attractively priced capital to fund our increased development expectations.

On the acquisition side, we purchased one facilities totaling 75000 square feet and the.

Southern California, mid County, Submarket and building with Bacon and given current leasing prospects, we expect it to stabilize at a four 6% yield.

I will now turn it over to Mark to discuss our financial results and guidance update thanks, Good afternoon, everyone.

For the quarter was <unk> 44 per share, which represents 12, 8% growth over the first quarter of 2021.

The increase core <unk> per diluted share was primarily driven by rental rate growth increased occupancy and portfolio growth and highly leased developments <unk> totaled $166 million.

Our best in class low level of capital expenditures, our strong NOI growth continues to generate significant <unk> growth on a share adjusted basis, even in excess of our <unk> growth.

Same property NOI growth on a cash basis for the first quarter of 2022 during the first quarter of 2021 to seven 3% the growth in same property NOI was due to increased occupancy and rate growth as well as the burn off of some free rent compared to the first quarter of 2021.

We do expect this growth to moderate a bit for the remainder of the year based mainly on less free rent burn offs same to same property NOI growth on a net effective basis was five 2%. This quarter as a result of our strong start to 2022, we announced revised core <unk> guidance for 2022 to a range of $1 88 to $1 94 per share.

During the previous range of $1 87 to $1 93 per share of $1 91 midpoint of our revised <unk> guidance represents over 10, 4% increase over 2021 results. We also announced revised guidance for growth in <unk> on a share adjusted basis, three between 91% and 13%.

With a midpoint of 11%.

Compared to the previous range of $8 four to 12, 3%.

For same property NOI growth on a cash basis, we've increased our guidance to a range of $5, 866% from the previous range of $5, 462%. This increase is mainly a result of his expectations.

Strong rental rate growth and occupancy through the remainder of the year similar to levels that we experienced in the first quarter on the development guidance. The market fundamentals are submarkets tend to be very supportive special developments and coupled with our lease up track record. We are revising guidance for <unk> to be between 145 billion.

Six 5 billion.

Compared to the previous range of $1 2 billion to $1 4 billion. This increase in development starts to provide a key source of growth in 2023 and beyond we've updated a couple of other components of our guidance based on a more optimistic outlook as detailed in a range of estimates.

Included in our supplemental informational website I will now turn it back to Jim for a few closing remarks.

In closing, even with some rising macro headwinds on inflation interest rate and geopolitical side of things. We believe that multiple secular tailwind is driving our business and overall positive GDP and consumer spending set up we'll continue to provide opportunities for strong leasing and development.

This combined with the substantial amount of embedded rent growth in our existing portfolio gives us great confidence in our ability to generate a double digit growth in <unk> for our shareholders.

Not just in 2022, but in the foreseeable future, which should generate because some.

Commensurate level of growth in our annual dividend.

Thank you all for your continued support of Duke Realty, We will now open it up for questions I would ask that you limit your questions to one or perhaps two short questions and of course, you're always welcome to get back in the queue.

Also please remember the prompt for Q&A. He is one zero is not stars arrow anymore and with that operator, we will open the lines and take our first question.

Thank you. Our first question comes from the line of Jamie Feldman. Please go ahead.

Yeah.

I guess just thinking about the guidance.

There's a lot that several areas where.

Clearly the outlook is better fundamentally more development starts can you just talk about maybe some of the things that may have been a bigger drag than maybe people were thinking about.

You've kind of weight, the positives and the negative if there was anything.

Hey, Jamie I'll start this is mark.

There are no really big drags I guess may be the only thing you could kind of point to this change.

Negatively on this year's <unk> number will be or increase in dispositions guidance most of that increase in disposition guidance will go to fund the development pipeline. So that's modestly dilutive this year, but it will be certainly accretive in the long run as we trade a low cap rate on dispositions sales for higher yielding develop.

Assets, but that was probably a little bit of a drag from where we were last quarter, but I think we're pretty optimistic start gear.

It's only better now.

And then if you think about.

Let's say, we do head into some sort of recession can you just talk about.

Portfolio credit quality today, and just how you think that whether it's earnings growth or occupancy.

Or even leasing spreads would hold up if you did we did see a pullback in the economy.

Those prior cycles.

Sure Jamie it's Jim I would make a couple of observations I think we can all point back to roughly two years ago at the start of the pandemic, which was a great stress test for our portfolio and the quality of our our credit tenants and reminding everybody.

Two to 24 months ago, we were collecting 99.99% of our reps so not that anybody wants to see that kind of thing again, but that's that's the kind of stress test that gives us confidence that.

Any sort of.

A downturn out there in the future our portfolio will continue to perform and then as Steve pointed out earlier, even if the market has softened to the point, where theres no rent growth in the markets, we still have 48% of embedded rent growth in our portfolio.

I would point to those two things is giving us a great deal of confidence in our ability to perform even if things were soft.

Okay, I guess just to be fair that I mean, there was a lot of government stimulus.

That kept tenants healthier I guess thinking about even earlier downturn.

If we look back.

Really declines.

No.

If you look at the number of tenants in our portfolio that that God.

Any sort of government assistance is less than 10%.

And if you go back and look at some of the some of the tenants that we did.

Brent offset agreements half of a prepay those early so I think that speaks to the quality and the resiliency of the portfolio as a tennis we've got.

Okay, great. Thanks for the color.

Thank you. Our next question comes from the line of Emmanuel Korchman. Please go ahead.

Hey, everyone. Good morning.

If we think about just the long term drivers of our growth in this business.

At this point in the cycle, how much of that should be coming from sort of the internal growth, especially with the mark to market as high as it is I guess the deeper question. There is how much of that we get each year in the next few.

A couple of years here and how much of that is going to come from external growth. So if we take your call round about 10% growth.

Is it half from development and half from this rent mark to market or is it a different proportion of that.

Youre pretty darn close Jamie or Kevin sorry, Manny.

We have a slide in our ability to get back to your question. This question to mine Mark.

Yes.

Hey.

We are applying our investor deck that lays that out.

Really hasnt changed much and Youre pretty much right on if you look at our.

Our external growth I think we quoted development return on like 10% to 12% to <unk> impact on <unk> net of financing costs of $4. Six so net those together in your 5% to 6% give or take of external growth and then our what I call our internal growth from floor.

GAAP.

Our same property is about 5%. So it's about 50 50, you're right on and I think the simple math the way to think about it our mark to market our portfolio like Jim said is 48%, if you roll plus or minus 10% a year that we've been doing a 48% or 5% growth.

That's simple math, but you're pretty close.

Great and then on the development starts is is there a.

Hi, there a cost or a mix component there. So we're looking at a number of starts and you're going to have this year versus the new guidance versus the old guidance has that changed as the new projects or is it more expensive projects or a couple of bigger projects versus some smaller ones before.

Yes. This is Steve.

Theres always some ins and outs.

I would tell you is a couple of more projects Theres nothing <unk>.

Significantly large list of skewing that one way or the other so similar to what we go in there and we've got most of next year capped out as well again theres always a few that we find along the way but.

We've been pretty diligent about building our land bank.

Having visibility for the next couple of years.

Our development guidance.

So Steve what would be the.

Potential for that to start guiding to go up again this year at all or is that kind of effects for 2002 at this point.

Our development guidance to go up again I'll start yes.

Yes, if we found another project that we are able to start near term but.

Are those are harder and harder to come by with entitlements. So.

Could it go up modestly, perhaps but most of what we have is we're already in some level of process.

Yes, I think I think the only significance.

That would be some big build to suits.

They're out there, but they take they take a lot of time, we've got a number of those built into the pipeline, but uli.

One or two more of those that I think you can see an appreciable increase.

Thanks Al.

Thank you. Our next question comes from the line of John Kim. Please go ahead.

Yeah.

Good afternoon.

On your development land Bank.

Saying now we can accommodate three years of development start that Youre correct run rate because the run rate has gone up.

What's your ability to source more land in your tier one markets and have development yields kind of remain attractive to you.

Yes, I would say I think thats the strength of our team.

We've been able to do that in the last three years looking back to 2019 2019 2020 in 2021.

We brand at a lower land bank number in this development our development starts have been in the same range.

So we've got.

<unk> said in our opening remarks, we've got a land bank that can support this level of starts for the next three years, there's always a number of sites that are under contract under option some level of due diligence.

But our teams are this is where our team schein and I think you've done a really nice job on Laguna, Yes, We're perspective, John we got almost double the land now that we had a year ago.

Steve's point, we've been doing this level of development all along a lot of that land is covered land generating income, which is even better but we have been buying about same amount we've been monetizing next year.

We're doing it through this whole cycle.

Alright, but development starts are going up so it's just the visibility on developments.

Doesn't seem as strong as it did before.

I was wondering on the second part of the question Multistory development in tier one markets.

Our non tier one markets.

And developments there when do these become more attractive.

Okay.

Yes.

The spread between the coastal tier one of the.

Tier one of the other markets job.

Right just given the difference in land cost does it become more attractive to do.

Developments outside of your closer trailing cities.

Yeah.

I'd tell you I think the land that we have either on the books for that we control. We believe it is in the right submarkets as all of our various markets. So.

The margins are consistently have been consistently and let's just say north of 50% in our development pipeline. So I would tell you the value creation opportunity in the whole portfolio.

It's really good and it's not a situation of where we're differentiating between markets or shifting our strategy I think we've got ample opportunity across the board.

Great. Thank you.

Yes.

Thank you. Our next question comes from the line of Caitlin Burrows. Please go ahead.

Hi, good afternoon.

Another follow up question on developments I guess initial 22 development start guidance was low versus 'twenty, one, but you did revise it higher than some of your peers have discussed issues with labor and materials impacting development potential. So just wondering if you could comment to what extent you've been impacted by current labor or material headwinds.

Impacting year potential.

Potential.

Yes.

I can tell you that.

We're closely monitoring what's going on with materials I would tell you our processes have changed a bit.

In terms of when we're starting design.

How quickly or how far out in front, we're procuring materials.

I'd tell you all of our 2022 starts.

Our locked in in terms of our start dates and design and our permitting as well as our early long lead material items.

Labour Hasnt been as big of an issue.

But materials have been but again I think this is where we're able to use our size and our balance sheet and our 50 years of experience to stay out in front of us.

Yes.

And as Steve's comment.

<unk>.

What's helping us drive our guidance on the development side is it related to labor or material cost is the land that we have in the portfolio when those sites are entitled and ready to go and.

And it's the leasing of our of our spec portfolio.

We've come out of the first quarter Ed.

Most of the way through April are much stronger than even we anticipated. So I think that's given us the confidence to go ahead and increase development guidance once again.

Yeah, and actually my second question was going beyond that speculative side I was just wondering.

It does seem like speculative development at this point definitely makes sense, but wondering what metrics you look at to gauge when speculative development is warranted and Youre open to Ed versus something that might be considered more risky.

Yes.

Well I don't know what we can do this more risky than speculative development.

Im open to ideas I suppose so when we look at is a number of metrics, what's the percentage leased in the development pipeline and even with the increase in the amount of speculative development, we're doing versus build to suit.

That number is still at roughly 50%, which is a number we're very comfortable with.

We look at the leasing volume.

Steve cited earlier this is the eighth.

<unk> consecutive quarter that were above 7 million square feet and we look at the overall occupancy the portfolio will be in service in the total portfolio both of which are above 99%. So I think the combination of all three of those metrics would tell you that.

We need to be doing more speculative development in 34 space due to the portfolio.

Got it yes.

Certain market conditions.

Might be considered more risky, but based on those metrics.

It seems that that next target.

Got it.

Thank you. Our next question comes from the line of Nick <unk>. Please go ahead.

Oh thanks.

I was hoping to get a mark you know in terms of the rent spreads that you are assuming.

And guidance for the rest of the year on a on a GAAP and cash basis.

Yes, Nick I think there'll be very similar to what we posted in Q1.

The mark to market on our portfolio sort of point Sterling on at 48% Theres really close to the 49% we posted in the first quarter, Steve mentioned only 18% of that roles within coastal markets is pretty similar to what we expect for the last nine months of the year, we still have a lot of coastal all coming.

Out of the last nine months, so I think youll see it may vary quarter to quarter, maybe a little higher or lower but by and large for the rest of the year I think youll see rent growth that we postponed deals very similar to the first quarter as we look out to next year, we're not going to give guidance, yet, but I would tell you that the coastal role we have next year.

A little bit over 30% compared to the 80%. This year. So as we sit here today I would expect it to get only better next year.

Okay. Great. That's helpful. Just second question is on development.

You could talk a little bit more about the yield.

The deliveries in the first quarter higher than it's been six seven expected cash yield there kind of what's driving that and then also.

I guess going back to the the yield that you quote on the development pipeline underway five 8% you know how we should think about ultimately you know that yield once you deliver since you did raise your market rent forecast and so no I don't think you're trending rents in your development yields. So maybe you can.

Just give us a feel for how that could play out.

Well I'll start first question and maybe try the second turnover smiles on our heels.

And Paul for really two reasons.

We are releasing our spec projects literally as they go into service, we're talking about as Steve mentioned, we started the spec projects. We delivered over the last 12 months were started at 3%. They are now a 100, they're virtually 100 when they went in service. So we've been leasing these up as two months or less we always underwrite one year. So when you look.

At our initial yields we've got a year of carry cost buried in the cost. So it brings our yield down so.

To the extent, we can lease was up 10 or 12 months earlier that helps yield. So that's part of it and then the second part is just rent growth you mentioned, we don't trend rents when we do our underwriting we underwrite current rents when we start to deal and then we only adjust that for signed deals.

So the deals we're signing based on the market rent currently experiencing are substantially inaccessible. We underwrote. So those two factors is what's creating that big pop in yields from initial underwriting to delivery and I would tell you as we look forward to the extent that dynamic continues you will see that result.

Okay. Thanks, Mark I appreciate it.

Thank you. Our next question comes from the line of Michael Goldsmith. Please go ahead.

Good morning, good afternoon. Thanks, a lot for taking my question.

You talked a bit about the drivers that are greater inventory resiliency and e-commerce growth.

But I wanted to dig into a little bit about <unk>.

Shoring the shutdowns in China escalate this conversation again and.

This this driver kind of it takes a little bit maybe longer than for the others to kind of realize in demand. So when can we really start to see this.

As a major contributor to demand going forward.

Yes, I think it's I think it's.

People are determined and now future proofing their supply chains.

Whether youre talking about resiliency or future proofing I think it's a trend we're going to see I think new.

New Mexico, and Central America relative to manufacturing, we're seeing some of it in spots in certain industries in the U S.

But the bigger the bigger impact near term to US is just more product on our shores.

So yes, I think it's definitely top of mind for all of our customers.

Yes, Michael I would add I think Steve is exactly right.

Near term impact is the safety stock.

Our customers are out trying to put it in their logistics and supply chains I think the impact of onshoring of near shoring will.

It will be a little slower, but steady steady or over the course of the next likely five to seven years because.

Rebuilding our reengineering manufacturing processing Assembly operations takes a little bit more time.

Just moving the logistics side of the business. So I think that's a better long mid term and long term driver for our space.

Got it and as a follow up.

Last year, you had a number.

More renewals than may be expected as people look to renew early what are you seeing on that this year and how did those lease negotiations differ from kind of traditional.

Exploration and what sort of escalators are you currently getting and sort of your renewals.

Yes, I would tell you, Steve I would say that.

Do we have customers trying to given the environment out there trying to lock up space earlier.

Certainly I think.

Good brokerage firm represented them would tell them to do if it's a critical piece of their supply chain.

Yes.

Well listen to customers, we'll talk with them.

But obviously, it's a landlord's market right now.

So we don't we don't tend to.

Negotiated rents too far in advance and today in today's market.

In terms of escalators and that's been a big point of emphasis for US you saw us move our escalators up latter part of 'twenty, one up north of 3% and what we were signing than in the first quarter of 'twenty. Two that number has moved to three 6% I would tell you I would expect that trend to continue there.

Rest of the year.

Certainly there is there is inflation numbers out there that would suggest that they could go higher for for us at our annual escalators within our leases.

Thank you very much.

Yes.

Thank you. Our next question comes from the line of Ronald Camden. Please go ahead.

Hey, just a quick one on inventory.

I know, it's been asked a lot of different ways, but.

When you speak in the tenant can you just give us a sense of what they're saying about their inventory levels and you know.

Are they happy how much more do they need just any color commentary would be would be really helpful. Because we keep hearing about so that inventory comment I'm wondering where you guys are seeing in your portfolio.

Sure I would tell you we do.

We do a space utilization.

Exercise twice a year with our tenants.

Tenants are utilizing space.

Turning there.

Our record levels for as long as we've been doing it.

Just just around 90%.

The the resiliency side of this of the build back of stock that they have we still think we pay a lot of attention to the inventory to sales ratio yeah, theres been a lot of debate.

By a number of people on this call as to.

Breaking that down by category and we've done that.

I would tell you we still think that there is a 5% to 10% build back to get to.

To get to pre pandemic levels for inventories for our customers and that would tell you. There's 300 to 400 million square feet of incremental demand that needs to get absorbed back into.

Warehouses.

Okay.

Got it that makes sense and then.

Just another one on a big picture, one on recession, which I know, it's being debated in the market.

Clearly you're not seeing it you know putting more capital to work here, but maybe if you could give us a sense of what.

When would you see it right what are some of the signs that you would have to see in your businesses. It could be build to suit it could be kind of commitments of capital like how do you guys think about what the leading indicators and your businesses are for it.

When things start to slow if they start to flow.

Well, Rob I think.

It was first manifest itself with us and I think our leasing volumes.

In our renewal discussions and things like that.

You kind of Peel back the onion, if we look at the deals that we're doing.

And the capital that our customers are spending as they start to pull back on capital investments inside the building I think thats, a pretty good leading economic indicators. So.

I guess one of the reasons, we followed that so closely in terms of.

Our renewal percentage, our leasing volume, where the development pipeline is so that we can keep a pretty good handle on that in a sense of the kind of demand. We're seeing and then the other thing, which we've talked about before is the build to suits and build to suits are the best leading economic indicator for us in our conversations.

Patients with our clients for the next 18 to 24 months, because youre talking about designing at the timeline and building buildings that arent going to be delivered until 2020 for in some cases 2025.

Customers aren't looking.

Theyre seeing problems out there in their logistics and supply chain. They are not going to be willing to make those commitments and sitting here today, we've got lots of those opportunities.

<unk>.

Thank you.

Thank you. Our next question comes from the line of Vince Taiwan. Please go ahead.

Hi, good morning.

Could you provide your lease mark to market on a cash basis and also share how that differs between some of your top markets.

Yes, Mark.

We realized a 48% on a GAAP basis and 35 on a cash.

And then as far as the markets.

I would tell you, it's pretty well spread is pretty even across all the markets with the two main outliers being southern California, and New Jersey.

Obviously, our coastal markets are a bit better overall, but if you will pull back the onion on the coastal markets Southern Cal and New Jersey are the biggest and you've got to keep in mind. Those are the two newest markets for us as well and Thats why we were only rolling 18% this year versus the 45% plus exposures that we have on those costs.

Why we're so bullish on our future outlook of this mark to market continue to only get better, but pretty well spread out other than those two markets are clearly at the top of the class.

No that makes sense or is there anything you can just quantify that a little bit just like how much higher in southern California, and New Jersey compared to the likes of Dallas, Chicago, Atlanta, like what order of magnitude roughly.

Double.

Literally doubled.

Yes.

Now keep in mind, some of the Dallas and Chicago and places like that.

We've got.

<unk> tried to displace right. We've got newer refresh releases buried in that number. So just hypothetically as Dallas was <unk> 45 in southern Cal is double that of <unk> strong numbers out part of that is because southern Cal believe it or not has smaller leases in our portfolio because we haven't got to enrolled yet and Dallas with enrolling all along so we don't.

Have as much churn left to go in Dallas that makes sense you got to look at the maturity of an all too.

Yes.

Yes.

No that's really helpful color.

One more for me switching gears.

As your asset mix in terms of whats targeted for disposition this year changed at all given the higher rate.

Do you think pricing has moved for properties that are no longer lease lower growth profiles.

We haven't seen it yet, but we have seen is that we've seen the buyer pool shrank a bit.

On the assets.

We've only had a few assets out in the market one of them is under agreement at the pricing that we expected to transact that.

<unk> four and a non non tier one market.

So we're keeping a very close eye on it there's a lot of chatter out there about it but I don't think anybody has really seen it yet.

So.

We'll be back we'll be opportunistic on the disposition side and evaluate each one as we go about it.

<unk>.

Good.

We think the pricing is right, we'll transact if not we won't.

Yeah.

Great. Thank you.

Yes.

Thank you. Our next question comes from the line of Cape and Kim. Please go ahead.

Thanks, Tom Good morning.

Just going back to your land Bank commentary you mentioned about three years of runway.

I'm, assuming you included the options that you have available.

But if you look at the land or half of that it include options actually in Columbus, Ohio, which I'm sure you could develop there, but I was just curious from a practical standpoint, there's really three years.

Because I can't imagine you guys are doing a bunch of Ohio development all of a sudden or should we expect you guys to continuously rebuild that land bank.

At a pretty strong case.

Even when you take a Columbus, Ohio formats.

Now to your point just to clarify and I think this is.

This is detailed in the supplemental.

Only place we have a long term land option agreement is at Rickenbach, Our airport in Columbus, Ohio, So everything else.

Supporting the.

The numbers that Steve put out is that we have either under contract under agreement covered land plays or already owned it on the books. So the Columbus option land is a very small piece.

It does not it does not represent the lion's share of our development pipeline for the next three years.

Okay. Thanks for that clarification.

Just going back to the topic of demand.

Yes, I think one of your.

Competitors talked about e-commerce , not being at the tip of spear anymore for demand in other segments stepping up.

And I know it doesn't work that way because the economy growth in population growth, there's always kind of continuous demand but.

In a simplistic sense.

Or how.

Far along our August corporate users in terms of.

Really getting the space they need and have locked it up and maybe the next round of demand just looks a little weaker.

Yes.

Well I'll make a couple of comments and then I think Steve can add some color as well.

People have talked or speculated about Amazon pulling back and we saw them.

Pulled back in terms of their deal signed last year and yet we had record demand across the country. So.

While we may see their demand moderate because of the how far along they are in terms of the build out of their supply chain I think the vast majority of our other clients are still playing catch up.

So I think we continue expect to see more <unk>.

Continued demand on the e-commerce from.

Everybody other than Amazon and I think a lot of companies are still playing catch up in terms of the capital investment in their ecommerce facilities.

Aero handling systems in the robotics are still in their early stages of development. We just saw a headline where Amazon is investing a $1 billion in robotics. So.

Yes.

I think we got a long runway to go in terms of e-commerce and its adaptation to the U S and the supply chain and I think that bodes really good for us.

Yes, David I would just add I think.

I would just add for us <unk> always continue to be the most active user in the market.

And we saw that in the first quarter, we saw that last year.

Retail or E.

E Commerce for us is probably fallen to about a third third category in terms of overall demand.

So as Jim said it's.

I think most of our customers are early on in their and their venture towards building out their own e-commerce platforms.

Okay. Thank you guys.

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

Hi, good morning, you've talked about how some of your non coastal markets are showing increasing strength here can you maybe go into more detail, there, which markets do you want to highlight in house as a supply environment involved with some of those non coastal markets.

So it's hard to it's hard to find a soft spot in today's world rate I would tell you for us Houston as we've talked about before uses private and the one market thats been a little soft for us but.

Markets this past quarter markets like Minneapolis, Raleigh, Chicago, Dallas, Atlanta, where all were all great markets for us in terms of rent growth in overall activity.

Nashville has been a good market for us as of late.

So again, it's hard to it's hard to pick a market that's not.

Doing well right now.

Got it and maybe one more I guess trying to lease mark to market. How should we think about that during a possible recession. How sticky do you think current rents are looking back at prior recessions, maybe not cope with it.

Other recessions, how to lease mark to market or overall rents trend and how.

How should we think about that risk over the next few years.

Well I'll start.

Inc.

Forget the recession, a 48% we expect it to get better because we don't expect risk.

To pull back anytime soon but I think the easiest way we think about it is if they go flat, which is a dramatic decrease from what we've experienced.

Last several years, we still have that 48% baked into our numbers. So I think we're very comfortable that even if we have some period of dislocation and rent growth stops.

Stay in the range of chat right now on what we saw 48% upside so how low can it go I don't know what I mean, it could go lower.

But I think we're very comfortable that the 48% selling and get better.

And sort of a downside scenario might be not a worst case for the downside of the state of 48.

Yeah.

Okay.

How did rents trend in 2008 and 2001, just curious if somebody newer to the space.

Well I think you've got to you got to factor in the different starting 0.1st of all for 2018, we werent at 3% vacancy heading into 2008.

Warranted.

I just don't know that you can always look at history and the environment. We're in now and draw a logical conclusions from it that will be mine planning.

Finally, the longevity.

Off the top my head.

I think to your point, even even if market rents fell.

And when it's truly negative.

Even if even if they fell 15% or 20 years, we still got a 48% mark to market.

So I can't imagine a scenario EBIT in 2008 through 2010 rents didn't fall 50%.

The other thing I'd point out is in 2008 today, we have 48, 44% of our NOI coming from coastal tier one markets that have 1% vacancy and don't have any land available.

Back in 2008 that was less than 1%, so theres a big difference there.

Thank you.

Thank you. Our next question comes from the line of Rich Anderson. Please go ahead.

Hey, thanks.

Just a couple of quick follow ups a lot of my questions have been answered, but there was you mentioned just to answer to a previous question just a little bit ago E. Commerce is the third largest.

Or was that in terms of activity leasing activity in the first quarter and maybe you can give me the breakdown of the industries I might have missed that.

Yes, our top one was <unk> that made up for us that made up a little under half of our overall activity.

Consumer product goods would be I guess, the next category I would throw out there is in terms of.

Activity retail e-commerce .

B, the third and then sort of.

What we call manufactured assembled goods would be would be the four categories and how has that changed over the past couple of years.

So I would say.

E Commerce, and <unk>, probably shifted consumer product goods have always been in that usually in the top four for our portfolio.

Amazons activity.

Past 345 years has always put ecommerce.

The top.

Okay Rich I would say you got to you got to take that with a little bit of grain of salt, but I'm not trying to make excuses, but.

The consumer products companies, how much of what they're doing is to support their ecommerce and how much is to support their or traditional supply chain.

The green area that moves back and forth, it's pretty easy to track Amazon and wafer dot com because thats purely an ecommerce platform. So there is.

There's a little gray area in there, but I think <unk> been pretty consistent all along the same can be said for <unk> two obviously right.

Great that's very much a gray area, perhaps more.

So I wanted to.

I had a sort of an idea about leading indicator of what's driving you to to expand spec development. At this point, you know where the war going on and inflation and so on and you mentioned.

Build to suits being the best leading indicator because those those are companies aren't going to make those types of commitment that they don't really see what they think theyre seeing but at the end of the day. They are ingrained in this business and you used the term catching up to Amazon so they might be willing to.

<unk> take on a little bit of a risk to two to play that catch up trade.

Not entirely an objective leading indicator if you were to ask me.

The real objective, leading indicators might be declining consumer sentiment in the face of inflation GDP growth.

Just released this morning down one 4% in the first quarter and yet Youre still youre still hanging on to the spec of the development process I don't know if I have a question in here.

But but I'm just wondering beyond the build to suit observation as you're as you're guiding light specular development what else is getting you there in the light in the face of all these other what I would call risks to the system.

Hi, rich those are all valid voice occupancy demand leasing volume nationwide vacancy all of those things.

Or would you be building more spec space.

If you just think about it.

At 99% and our in service portfolio, we don't have enough space to handle just the organic growth of our existing customers.

Yeah, but 99 is a coincident indicator and it could go down.

As much as it could go up depending on demand of tenants and vacancies and all that sort of stuff and I don't mean to you know.

To litigate. This on this call I, just I just feel like.

Sure.

The expand specular development at this point seems seems like you know.

A brief step.

And youre not the only one doing it but I.

I guess I'll just.

Leave it at that.

Thanks.

Yes.

Thank you. Our next question comes from the line of Mike Mueller. Please go ahead.

Hi, two quick ones here first who are you typically buying land from today and what portion of your spec.

Spec activity is in existing parks.

We typically buy I would say two different today.

The private sellers people on land for a long time, whether that was a business or are owned by a family or a private company.

Two is I would say companies that are that we are redeveloped the site something they've owned for a long time.

And in terms of the.

The other question was our <unk> development in existing business parks are there.

Third one one of our projects.

Looking at the list here I think one of our projects.

Then in existing business Park everything else was Ah.

<unk>.

So we've been working on and added.

Some version of our land Bank that was asked on this call a number of times over the past year.

Got it okay. Thank you.

Thank you. Our next question comes from the line of Blaine Heck. Please go ahead.

Great. Thank you.

Obviously, you guys put up some really sizable rent spreads this quarter, especially on a net effective basis at 49% and especially given that only 18% are in those tier one market. So I was wondering to what extent the term of the leases rolling off is affecting those strong rent spreads are those those leases kind of seven or more years old.

That's what's driving that high mark to market or are they closer to three to five years old and those those rent spreads are really indicate.

Indicative of.

Very strong rent growth that you've seen even in those lower tier markets over that short period of time.

Yes, Blayne, so little balls.

What I would call extremely long leases rolling.

It's a little bit longer than the three to four year term that you mentioned. Thank you average terms enrolled was about five or six which was about what our overall portfolio as we sit here today.

So it's just a combination you know we've seen great rent growth across all markets, whether you pick a market like Chicago or into your Atlanta Places, we've been a long time <unk> been great not as good as southern California, and New Jersey, but certainly been a lot.

Better than that built in escalators within the lease so it's.

Not like its a lot of 15 year deals rolling or anything like that it was like six five to six year deals rolling.

Pretty good solid growth across all the markets.

Alright, great that's helpful. Marc and then.

Noticed that about half of your starts during the quarter on a square footage basis, where in Indianapolis, obviously, it through your hometown and we probably expect you got to keep a footprint there, but can you talk about your longer term plans for that market and if we should continue to expect growth there and maybe Steve can talk about the fundamentals that you're seeing there relative to some of the trends in the <unk>.

Tier one markets.

Sure.

I wouldn't read a lot into the fact that we started three buildings. This quarter. It's just the timing thing was when we had.

We like the markets. We're in obviously, we've got a long history in this market, we've got a very deep customer base.

And we're in we're in we're in the right Submarket.

And he's probably got some headlines recently about some overbuilding I will tell you thats occurring on for those of you familiar with Indianapolis on the east side of the far South side, that's not where these buildings are located.

We've got great history here I think we know the market better than anyone and I expect those projects to be successful longer term, yes, we haven't been super active on the development front and Andy.

It's a good market for us and where we see opportunities we'll take advantage.

Great. Thanks, guys.

Thank you there are no questions in the queue. Please continue.

Yes, I'd like to thank everyone for joining the call today, we look forward to engaging with many of you throughout the year. Operator, you may disconnect your lines.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T conferencing service you.

You may now disconnect.

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