Duke Realty Corporation

Q1 2021 Earnings Conference Call

4/29/2021

spk10: 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, there will be time for questions. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ron Hubbard. Please go ahead.
spk15: Thank you, Don. Thank you, Don. Good afternoon, everyone, and welcome to our first quarter earnings call. Joining me today are Jim Connor, Chairman and CEO, Mark Dineen, Chief Financial Officer, Steve Schnur, Chief Operating Officer, and Nick Anthony, Chief Investment Officer. Before we make our prepared remarks, let me remind you that certain statements made during this conference call may be forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from expectations. These risks and other factors can 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, April 29, 2021, and we assume no obligation to update or revise any forward-looking statements. For 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. If you did not receive a copy, these documents are available in the investor relations section of our website at DukeRealty.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 as well. Now for a prepared statement, I'll turn it over to Jim Conner. Thanks, Ron, and good afternoon, everyone.
spk16: I will open by saying, as always, we hope you and your families are safe and healthy and that you've had the opportunity to be vaccinated. The fundamentals of our business continue to be as good as ever. We've now had two successive quarters of demand breaking all-time records. Our development platform had a record first quarter of starts, and our core portfolio continues to perform at the top of the class. Our liquidity position and sources of capital are very attractively priced to capture opportunities, including our execution of two green debt transactions. All of these drivers result in us raising key components of our 2021 guidance that roll up to double-digit growth and expected core FFO and AFFO at the midpoints. Now let me turn it over to Steve to cover our operations. Thanks, Jim. I'll first cover overall market fundamentals and review our operational results. Industrial net absorption in the first quarter, according to CBRE, registered an impressive 100 million square feet, marking the first time that demand has exceeded 100 million square feet in consecutive quarters. This was more than enough to offset new supply as completions dipped to 57 million square feet from about 70 million square feet in the fourth quarter of 2020. This positive net absorption over deliveries for the quarter reduced vacancy down to 4.4%. which is back down near the record levels we saw throughout most of 2019. The strong mix in fundamentals increased asking rents by over 7% compared to the previous year. CBRE now projects demand for the full year to surpass 300 million square feet, perhaps even breaking the 2016 record of 327 million square feet. They project deliveries to be about 300 million square feet as well. The overall sector continues to remain very much in balance, produce another year of growth in asking rents of high single digits nationally. On the macroeconomic front, increasing pace of vaccinations, the stimulus being pumped into the U.S. economy, and the arrival of spring weather has generated some significant recent data points indicative of a very strong year in our business. The recent March consumer confidence reading is back near the range of 2018 and 2019, and and the GDP growth is projected to be in the 6% to 7% range. This bodes very well for demand in logistics real estate, and in addition, we have the secular drivers in our business that remain firmly intact and stronger than pre-pandemic. To that point, the growth in retail sales and e-commerce sales across the two-month February and March period were up 12% and 28% respectively. And perhaps more notably, when measured against the 2019 pre-non-pandemic timeframe, the recent February and March figures were up 15% and 43% respectively. In addition, the experience of the supply chain bottlenecks and response for greater business inventory redundancy is expected to push the retail inventory to sales ratio to above historic levels, yet it now sits near record low levels. Demand by occupier type remains broad-based and very active, pure e-commerce, omni-channel retailers, 3PLs, healthcare supply firms, and food and beverage companies leading the way. Now I'll turn to our own portfolio. We executed a very solid first quarter by signing 7.4 million square feet of new leases. On first-generation leasing, we signed three transactions to stabilize assets that were previously in the unstabilized in-service and spec development pools, including 146,000 square foot lease on a spec development percent of the space. The lease activity for the quarter, combined with strong fundamentals I mentioned, led to continued growth in rents in our portfolio as we reported 11.4 percent cash, 26.2 percent on a gap basis. The mark-to-market in our portfolio leases is at 17 percent below market rental rates, which is supportive of continued strong rent growth. We also had an exceptional quarter of development starts. As initially reflected in our press release last month, On top of the $373 million of starts we reported in the press release, at quarter end we signed another $39 million project in the Tampa's market, which was a bill to sue for an e-commerce retailer. In total, we started 11 projects during the quarter, totaling 3.8 million square feet and $412 million in costs. These projects were 60% pre-leased, with value creation estimated near 40%. We're also very proud that three of the four build-a-suits we signed here in the quarter were with repeat customers. Our development pipeline and quarter end totaled $1.4 billion, with 68% allocated to our coastal Tier 1 markets. This pipeline was 65% released as of March 31st. Looking forward and consistent with the strong fundamentals I discussed and our best-in-class local operating teams, Our outlook for new development starts is as strong as it's ever been, as reflected by our revised guidance of over 30% from our original midpoint. I'll also note we do expect our pipeline pre-leasing percentage to potentially drop a bit in future quarters as we put fully leased assets in service and start more speculative development projects in high-barrier Tier 1 sub-markets where fundamentals are very strong. I'll now turn it over to Nick Anthony to cover acquisitions and distributions.
spk13: Thanks, Steve. For the quarter, we sold 94 million of assets comprised of two facilities in Houston as well as two facilities in Indianapolis owned in a 50-50 joint venture. In turn, we used part of these proceeds to acquire three buildings totaling 680,000 square feet for $51 million, including one asset in Southern California's IE West Submarket and one in Northern New Jersey's Meadowlands Submarket. The third facility acquired was in the Indianapolis Airport submarket and was part of a joint venture liquidation and asset swap. These buildings were all 100% leased within markets where we expect strong market rent growth that will contribute to long-term IRRs well in excess of the assets we sold. From a strategic positioning standpoint, the net effect of our development, disposition, and acquisition activity this quarter moves our coastal tier one exposure to over 42% of GAV. We've begun marketing a few Midwestern assets leased to Amazon for outright sale, while certain assets leased to Amazon and other non-coastal tier one markets may either be sold outright or contributed to a joint venture. In addition, the more recent news on disposition in last night's press release is that we are now marketing for sale our entire 5.2 million square foot St. Louis portfolio. The rationale on the sale is threefold. One, we are taking advantage of increased investor demand for logistics assets. Two, the portfolio accelerates our strategic objective to increase our exposure to coastal Tier 1 markets. And three, it will provide a source of funds for our increasing development pipeline. As a result, we have raised the midpoint of our four-year expected dispositions by $400 million. Altogether, we expect our planned 2021 disposition activity to be weighted toward the middle of the year. I will now turn our call over to Mark to discuss our financial results and guidance update.
spk14: Thanks, Nick. Good afternoon, everyone. Core FFO for the quarter was $0.39 per share, which represents 18% growth over the first quarter of 2020. We've been saying for the last few quarters that we expected our core FFO growth rates to accelerate and begin to approach our already strong AFFO growth rates. The results from the current quarter and our revised guidance certainly reflect this. AFFO totaled $140 million for the quarter. Our best-in-class low level of capital expenditures along with the strong NOI growth continues to generate significant AFFO growth to reinvest into our business. Our best-in-sector rent collections continued in the first quarter of 2021 with more than 99.9% of rents collected. We have also collected more than 99.9% of April rents, and we now only have $52,000 under deferral arrangements remaining to be collected and had effectively no bad debt expense in the first quarter. Same property NOI growth on a cash basis for the first quarter of 2021 compared to the first quarter of 2020 was 6.3%. The growth in same property NOI was due to increased occupancy and rent growth as well as the burn off of free rent compared to the first quarter of 2020. We do expect this growth to moderate for the remainder of the year based on tougher occupancy comps and less free rent burn-off, but to remain strong nonetheless. We finished the quarter with no outstanding borrowings on our unsecured line of credit, which we renewed in March and extended through March of 2026, including our extension options. We reduced our borrowing rate by 10 basis points compared to the previous facility. As part of our commitment to corporate responsibility, the credit facility also includes an incremental reduction in borrowing costs if certain sustainability-linked metrics are achieved each year. Our future debt maturities are well sequenced with less than 3% of our total outstanding debt being scheduled to mature prior to the end of 2023. As a result of our strong start to 2021, we announced revised core FFO guidance for 2021 to a range of $1.65 to $1.71 per share compared to the previous range of $1.62 to $1.68 per share. The $1.68 per share midpoint of our revised core FFO guidance represents an over 10% increase over 2020 results. We also announced revised guidance for growth in AFFO on a share adjusted basis to range between 8.0% and 12.3% with a midpoint of 10.1% compared to the previous range of 5.8% to 10.1%. This increased earnings growth expectation is impressive when considering we are increasing current year disposition expectations by $400 million to fund development projects that will not contribute to earnings until 2022 and beyond. For same property NOI growth on a cash basis, we've increased our guidance to a range of 4.1% to 4.9% from the previous range of 3.6% to 4.4%. We continue to outperform our underwriting assumptions for speculative developments, both in the timing of lease up and in rental rates achieved, and continue to maintain a solid list of build-to-suit projects. Based on this, our revised guidance for development starts is between $950 million and $1.1 billion, compared to the previous range of $700 million to $900 million. This increase in development starts will provide a key source of growth in 2022 and beyond. As Nick mentioned, we intend to take advantage of the investment sales market pricing an increase in dispositions. Our guidance for dispositions has been revised to between $900 million and $1.1 billion, compared to the initial range of $500 million to $700 million. We've updated a couple other components of our guidance based on our more optimistic outlook, as detailed in our range of estimates exhibit, including our supplemental information on our website. I'll now turn it back to Jim for a few closing remarks. Thank you, Mark.
spk16: In closing, a strong economic recovery is unfolding, and numerous secular drivers are continuing to create unparalleled opportunities for our platform to capture growth from rising rental rates, high-margin development opportunities, and from raising capital at a very low cost. We're very pleased with our team's execution in the first quarter and now with our expected double-digit growth in core FFO and AFFO. As long as these multiple tailwinds can sustain, and as long as the economy continues to recover, we're optimistic we can achieve similar levels of growth for the foreseeable future, and are hopeful it should lead to corresponding increases in our annual quarterly dividend. Thank you for your interest and your support, and we will now open it up for questions. We would ask that you limit your questions to one or perhaps two short questions. You are of course welcome to get back in the queue. Also, please remember the prompt for Q&A is 1010. Don, you can open up the lines and we'll now take questions.
spk10: First, we're going to the line of Blaine Heck. Please go ahead.
spk18: Great. Good afternoon. I'll start with Nick. As you mentioned, you guys raised disposition guidance pretty significantly this quarter. Outside of St. Louis, are you guys selling any other portfolios, or will the rest be more kind of one-off and the sale of the Amazon facilities? And then can you give us any sense of how much pricing has actually changed this year, especially in those, you know, kind of secondary markets where I'm assuming most of the dispositions will be?
spk13: Yeah, Blaine. So most of the other assets are sort of one-offs, a couple Class B, but mostly long-term credit deals, a lot of them leased to Amazon. So that makes up the rest of it. There's really no portfolios in that guidance number outside of the St. Louis portfolio. As far as pricing goes, we continue to see cap rate compression. You know, it's The secondary markets have compressed more recently than the coastal markets. But especially some of these Amazon assets, we've been very pleased with the pricing that we're seeing on those transactions as well. So I'd say over the last 90 days, it's probably been another 25 bps on compression.
spk18: Great. That's really helpful. And then maybe for Jim, several of your competitors have talked about the rising cost of construction now, not just from increasing land costs, but also the raw materials. Can you just talk about how you guys are dealing with that increasing cost and whether you think rents are rising fast enough to keep yields steady, or maybe should we expect a temporary dip in yields as the material costs are temporarily elevated?
spk16: Yeah, thanks, Blaine. I'll start, and then Steve can give you a little color. We've been dealing with land prices escalating for a number of years now, so that's not anything out of the ordinary. Steel is the latest one, and a lot of people are talking about that. One of the advantages of being a national developer is, A, the number of relationships that we have, the leverage that we have, and our team's ability to go out and accelerate some of the design and procurement. So sitting here today, we can comfortably tell you that we have the steel we need to finish everything that's in the development pipeline for the balance of the year. And I think Steve can give a little more color on, you know, what some of the local teams are doing. Sure, Blaine. I would just tell you, you know, steel is gaining a lot of headlines. Lumber is another one. Land is obviously, as Jim indicated, has been up significantly for a number of years. You know, rents are certainly keeping pace. Cap rates are helping. I think the bigger concern, I guess, or cautious thing that we pay attention to is the timeframes. You know, steel's pushed from 10 to 12 weeks to probably 24 to 26 weeks. So more upfront cooperation with architects and tenants to get projects started to make sure you can deliver on time.
spk18: That makes sense. Thanks, guys.
spk10: Thank you. And next, we're going to the line of John Kim. Please go ahead.
spk11: Thank you. On your spec development, are you sensing that there's also increasing spec in your markets from public and private developers? And are there any markets where you're concerned that the spec development is escalating quickly?
spk16: Sure. Keevan, I'll tell you, I think there's competition everywhere. I do think I do think the private players, particularly the larger private players, have been active on the merchant development front. Our focus and where we've got our land holdings in the high barrier markets, I think we indicated in our release that 88% of our land is now in the coastal tier one markets. The competition there, the vacancy rates there, many times are less than 2%, so I think we're comfortable with that. I would tell you, in terms of markets we're concerned about or monitoring supply, there's always going to be a handful of sub-markets scattered around, but Houston's the one that we have no intentions of starting any projects in Houston. But that market needs to shore itself up a bit.
spk11: I know you gave your excuses on why you're exiting St. Louis, but why not go the joint venture routes in that market? That seems to be the strategy with some of the other markets.
spk13: This is Nick. The question was why not JV, the St. Louis assets? You know, generally we have kept them work. We try to keep our model more simplistic. And we don't think strategically a joint venture there would make as much sense and maybe in some other instances where you could grow it. I just don't know how you, what you do with it going forward.
spk10: Got it. Thank you. Thank you. And next. We go on to the line of Manny Coachman. Please go ahead.
spk05: Hey, everyone. Maybe this one's for Mark. Just thinking about using dispositions for capital funding for the developments versus issuing common stock here, what's sort of more attractive about selling the assets and exiting those markets than just going through an equity race?
spk14: Well, I guess we're using a little bit of everything, Manny. I mean, we did issue a little bit on our ATM in the first quarter. You know, I guess what I would say, and Nick can follow up on this, the St. Louis exit has sort of been on a list for a while. It's really more of an acceleration, something we were probably going to do down the road anyway. And as our development pipeline opportunities ramped up, we just kind of pulled forward some things that we were going to do anyway. But we'll continue to use a little bit of everything. as long as our capital is attractively priced.
spk13: Yeah, what I would add is this was an opportunity to basically improve our geography going forward and also improve our growth profile going forward just to help improve performance in the future.
spk05: And Nick, I don't know if we've talked about this in a little while, but can you talk about the pricing differential between single assets or larger single assets and portfolios? Sure. Is there a pricing difference? And if so, are you looking at one more than the other?
spk13: Well, there's certainly, it's sort of a mixed bag. It's not as black and white as you might think. You know, obviously the long-term credit deals are garnering very low cap rates. A lot of them are brand new, new development. A lot of the portfolio deals that you see out there are a blend of Class A and Class B assets. And a lot of it depends on where the rents are in relation to market. So they generally trade at higher cap rates. And the buyer pool is not necessarily as deep on those because they're a little harder to underwrite and get your hands around. But it is sort of comparing apples and oranges there on those two different types.
spk05: And then the second part of the question, are you more interested right now in buying some single assets in varied markets versus picking up a portfolio? Yeah.
spk13: Typically on the acquisition side, we focused on one to three assets at a time because we want to focus on buying what we want, where we want it. So it complements our strategy. Typically when we've done larger portfolios, we got lucky with the bridge transaction several years ago because it's all where we wanted it. But typically what happens on some of these portfolios is you get a lot of assets and locations that you wouldn't normally want to be in. And it creates a lot of friction and noise trying to reposition those portfolios after you get them.
spk05: Great. Thanks, all.
spk10: Thank you. And next, we're going to the line of Jamie Feldman. Please go ahead.
spk12: Great. Thank you. I think you had mentioned in your earlier comments about sales into a JV, if I heard that right. Can you talk more about the plans there, and is this something that you would keep as kind of a perpetual structure and continue to sell, kind of grow it, or is this more one-off?
spk13: Yeah, I mean, we're looking at all the different levers as far as monetizing assets. One of the things that we've talked about is being prudent about managing our Amazon exposure going forward because we continue to do a significant amount of business with them, and I think their exposure at the end of this quarter is right around 9%. And we'd probably rather be in the 4% to 7% range going forward on that. So there are some assets that maybe we don't want to sell outright because of where they are or what type of asset they are. And we may take advantage of a JV structure in that case. And then that might be something that we can use to monetize future assets similar to that going forward.
spk12: Okay. Any thoughts on structure in terms of your stake versus a partner's stake? and potential magnitude?
spk13: No, I think we're evaluating all that stuff. You know, obviously we need to do something, a decent amount of monetization to make sense to manage the Amazon exposure, but we don't have any, you know, hard numbers in mind.
spk12: Okay. Have you started talking to partners?
spk13: Yeah, we have had discussions, but we've always had discussions with partners over the time. We talk to a lot of our existing partners, you know, about this whole concept on a regular basis. Okay.
spk12: Would you consider more of like a fund structure?
spk13: No, I mean, no. I think historically we've used more of the JV structure. Could it be a JV with multiple partners? Maybe. But not necessarily a fund structure.
spk12: Okay. Thank you. And then just as, you know, here we are in kind of a unique time in the economy where things are picking up, Any anecdotes about kind of new types of tenants, leasing space, anything that kind of stands out from the quarter that might be different than what you've talked about in the past? No, Jamie, this is Steve.
spk16: I don't think so. I think 3PLs continue to be very, very active, and I think that's centered around e-commerce. It's also centered around the theme you've been hearing about for a while with inventory redundancy. You know, 3PLs have always been active, but I think right now they've sort of taken over the lead by a wide margin over anyone else.
spk12: Okay. Thank you.
spk10: Thank you. And next we're going to the line of Nick DeLico. Please go ahead.
spk06: Thanks. Just a question on, you know, kind of your pricing strategy right now because you It looks like your tenant retention has picked up this year versus last year. It's obviously a good thing for occupancy, raise that guidance. But I guess I'm just wondering how you're kind of approaching pricing discussions with renewals, whether you're willing to deal with a little bit more frictional vacancy to push pricing in the portfolio.
spk16: Sure, Nick. This is Steve. Yeah, it's a case-by-case basis, but we are certainly pushing the envelope. I think this quarter we did not have very much roll on the coasts, so our results, which we were happy with on the rent growth side, I think there's some upward trajectory to what we'll do the rest of the year. We're continuing to push fronts. We're having some difficult conversations. They aren't easy conversations, but we're willing to take some space back if we need to.
spk06: Okay, thanks. This second question is on the development land, where I know you give the book basis, but 88% of that you're listing here is being in coastal Tier 1 markets. maybe just give us some sort of perspective on how much, I know we keep hearing land prices are going up substantially. You do have a very big Southern California land bank. Maybe just a little bit of perspective on where you think the land is really worth on a market basis for all of your land held for development.
spk16: Yeah, we just looked at that. It's in the low 40s mark to market, so we've We have quite a bit upside in our land holdings.
spk06: You said, sorry, it's about 40% higher than the book value?
spk16: The market value is, yes, over our book value, correct.
spk06: Okay, perfect. Thank you very much.
spk10: Thank you. And next, we go on to the line of Caitlin Burrows. Please go ahead.
spk01: Hi there. So you're obviously very active in development now. You started $800 million in 2020 and 2021 guidances for over a billion dollars at the midpoint. So I was just wondering, do you believe there's runway for the 21 volumes to continue? And that's from both a demand perspective and also your ability to get land and complete projects in the target markets?
spk16: Yeah, Caitlin, I would tell you, as I kind of tried to reference in my closing remarks, If the economy continues to recover, as it certainly is indicating it has, and we're able to achieve the kind of GDP growth in the second half of the year that most of the leading banks are projecting, yeah, we think next year is going to be a very, very good year, and we should have ample opportunity to do a comparable level of volume.
spk01: Okay, great. And then I think just following up on one of the recent questions on the key assumptions that you guys have at the end of the supplement, it does mention that you're willing to push rents at the expense of some occupancy, which I think makes sense given high occupancy. But we haven't yet seen that play out in the leasing spreads. Obviously, they're high, but versus last quarter, even a year ago, not as high. So just wondering, do you think we should expect to see the leasing spreads rise in the near future, or would that take a little bit longer to play out?
spk14: Let me start that, Kaylin. This is Mark. One thing, you know, we've been talking a lot about where the leases we have that are rolling, where they're located. You know, over 40% of our NOI now are in the coastal markets. This quarter, it just so happened that only about 10% of our roll was in the coastal markets. So, you know, I think that we're still very happy with you know, 12% plus or minus cash and almost 30 gap when 90% of that role were in non-coastal markets. You won't see us get to the 40% role that our portfolio looks like for a few years down the road, but I think you will see us pushing closer to, you know, 20 to 25% of our role for the next year, year and a half will start to be more in those coastal markets. So that does give us the opportunity to get those rates up even higher than what they were this quarter. I don't know if Steve wants to add anything to that, but. Just a little point on where the – I think it's important to know where the role was, and when 90% of it are non-coastal markets, we still achieve those numbers. We're pretty happy with that.
spk01: That makes sense. Thanks.
spk10: Thank you. And next, we're going to the line of Vince Tavoni. Please go ahead.
spk09: Hi, good afternoon. Could you discuss how your market rank growth expectations this year differ between coastal markets, Tier 1 non-coastal markets, and the remainder of your portfolio?
spk08: Sure.
spk16: Events, all things to have. I'll tell you, I think there's clearly the numbers that get published are on a macro basis. You really need to dig into the individual sub-markets. I think Some of the high barrier infill coastal markets are pushing high single-digit rent growth, if not double-digit. I think in the center part of the country where you have less barriers to supply, you're probably in the lower single digits. That probably averages out to that 6% to 7% rent growth that we've been seeing from CBRE. So I don't know if that – hopefully that answers your question. There is obviously discrepancy by availability of supply.
spk09: That's really helpful. Any difference between some of the coastal markets, like New Jersey versus SoCal, anyone standing out, or are they kind of similar in this high single-digit range?
spk16: I think the two markets you indicated are extremely active, very low vacancy rates, very little new supply being added. That's not being absorbed quickly. And so those two markets are doing really well. I think, you know, Seattle continues to perform well. You know, there was, I'd say Northern California had a bit of a slowdown. I think it was more affected COVID related, but seems to be coming back pretty strong with what we have there.
spk09: Got it. I think that's really helpful. If I could squeeze one more in. Can you just provide a little color on the pricing and marketing process on the Houston dispositions? Just curious, given some of the challenges in that market, how does that differ from some of the other dispositions you're marketing?
spk13: Hi, Vic. This is Nick. You said Houston dispositions? Yes.
spk09: Yeah, just curious if that, you know, we've seen weaker demand there, weaker pricing compared to some of the other regions.
spk13: Fortunately for us, they were long-term leases with Amazon, so it was a great experience. The buyer pools were very deep, and the pricing was very good, like we're seeing across the country. So, you know, that was obviously the reason why those went well for us.
spk09: Got it. And is Houston a long-term hold for you, or is that something you could potentially consider, for example, exiting as well, similar to St. Louis?
spk13: No, I think, you know, we're cognizant of our exposure there, but we have no plans to exit Houston in the future. So we just keep an eye on it and manage it.
spk09: Great. Thank you.
spk10: Thank you. And next, we go on to the line of Mike Mueller. Please go ahead.
spk07: Yeah, hi. Two quick ones here. First, what's the difference between the Amazon assets that you're looking to sell outright versus what you would consider to put in the JV? And then second, when you're thinking about your in-process development pipeline, is there a max level or some sort of cap that you want to stay under?
spk13: Mike, this is Nick. I'll take the first part, and I'm sure Steve will take the second part. In terms of what we're looking to sell outright versus joint venture, it's primarily location-driven for the most part. Generally, it's the growth profile of the asset. So if it's an asset that has a good embedded rent growth and a market that has good prospective rent growth going forward, we're probably more likely to put it in the JV versus sell it outright. So that's generally how we've looked at it. And then the second part of your question.
spk16: Yeah, the second part of your question on the development opportunities, obviously developing at the margins as we are, the more we can do, the better. I think we pay attention to what our exposure is relative to the overall size of our company. And we're at roughly 9% now. I think we'd start to get nervous if we were you know, 12%, 13%, something like that.
spk07: Got it.
spk10: Thanks. Thank you. And next, we go on to the line of Dave Rogers. Please go ahead.
spk03: Yeah, good afternoon. Steve, maybe a question on lease rate growth. You talked about it by geography, but maybe just some color on lease size and what you're seeing in terms of the rate growth across your portfolio in the last quarter or so.
spk16: Yeah, Dave, this is Steve. You're a little broken up, but I think you asked about lease rates by size and maybe location. I would tell you, for us, again, the portfolio that we operate, our best performing size segment this past quarter was $100,000 to $250,000. I think historically going back the last six or eight quarters, I would tell you it's tended to be better on larger size. So I would expect that to be the case this year based on the demand we're seeing. It's hard with one quarter into the year to read much into that. But for us, the large size segment continues to be the most active.
spk02: Great. And then I think coming into, and sorry, I do have a bad connection, but I think coming into the year, you guys had talked about losing some tenants early on that would roll out. Obviously, you had a little bit of that, but did that all hit in the first quarter? Do we expect to see any of that moving into the second quarter? Were you guys just successful at kind of stepping in and backfilling a lot of those leads fairly quickly to start the year?
spk14: Yeah, Dave, this is Mark. Yeah, at the end of last year, on the January call, I guess, we talked about four or five tenants in I guess first off I'd say these were not significant tenants, but there were four or five. We were basically in the process of trying to get evicted and re-tenant that space. So the good news is all of that space has been backfilled. In fact, a couple of those tenants actually got current under rent and went through some M&A transactions themselves, got current, are going to stay in the space after all. Another couple of them, the other half I would say, we've now got out of the space. We've got leases signed to backfill it. There probably will be some downtime in rent here in the second quarter, but the leases are all signed, and we should be back up and full running with better rents and better credit, obviously, come Q3. Great.
spk10: Thank you. Thank you. And next, we're going to the line of Rich Anderson. Please go ahead.
spk17: Hey, thanks. Good afternoon. So I wanted to ask about the Amazon commentary, obviously, selling to get your percentage down. What's scary about 12% Amazon? I mean, I could think of a lot worse tenants to have a 12% exposure to. Is that coming, you know, kind of a – who's driving that decision? Is it just intuitive about your part or participants in Duke Realty outside of you that, you know, want to – whether they're rating agencies, I don't know who it could be, are sort of driving – a decision to lose some of that concentration? Or is it, you know, just a natural observation on your part?
spk16: Well, Rich, it's Jim. I'll start out and give you my perspective. Nick can chime in. I sleep very well at night with the amount of Amazon exposure we have given their credit profile and their growth. But, you know, part of it is input from the rating agencies and, you know, managing that. Part of it is, as Steve alluded to earlier, we have a very active development and leasing pipeline with Amazon. So left unfettered, that number is just going to continue to grow at a very, very rapid pace. And what Nick's guys are able to do, as he detailed to one of the earlier questions, is pull out the assets that have probably the lowest escalations, are in the markets where we have, you know, the least amount of upside, so to speak, and select those for outright sales and some for the joint venture, and some are in, you know, the infill markets that we work really, really hard to get a hold of, and those are incredibly valuable assets, and we want to hold those for the long term. So, Nick, you can add to that.
spk13: Yeah, I think that's right. And we're just, you know, we're trying to be prudent in our diversification of our overall portfolio. in terms of assets, geography, and tenant exposure. So we're just trying to maintain a good balance.
spk17: Yeah, I understand. I'm just being double-edged.
spk13: We're not afraid of it.
spk17: Okay, and then the second question is perhaps a little somber one. With the events in Indianapolis at the FedEx facility, I just wonder if there is any response from the community of industrial real estate owners about enhanced security or anything? I don't know what you could have really done, but I'm just curious if there was any necessary reaction on the part of not just you, but your peers.
spk16: Yeah, Rich, I'll make a couple of high-level comments. I will tell you that the amount of interaction that our local operating teams have had with our tenants, starting well over a year ago in helping them manage COVID protocols, and enhancing the environment for the safety of their associates. Second, the work that we've done with our own people in the development of our buildings because the number of people that we have on site when we're building a building. So those increased protocols and safety in general. So I won't say that any of it is in reaction to horrible events like what we saw at the FedEx facility, but I will tell you the amount of interaction on, you know, all of those subjects with our tenants is probably double today from what it was 18 months ago. Okay, great. Thanks very much, everyone.
spk10: Thank you. And once again, if you have a question, please press 10. Next, we're going to the line of Brent Diltz. Please go ahead.
spk04: Hey, great. Thanks guys. Um, in the prepared remarks, you made some comments on inventory to sales levels. So could you talk about how large a safety stock buffer might ultimately get built in five to 10% frequently thrown about? So I'm just curious what you guys think.
spk16: Yeah, I think, well, I would tell you, we read the same research reports that you guys do. Uh, and I think five to 10% seems to be what everyone talks about, which translates somewhere in the neighborhood of, of a half a billion square feet of demand. Um, We see cases of it every day now where we're talking to, whether it's retailers, e-commerce groups, a lot of the 3PL activity. Transportation costs are going to rise significantly with the new administration and a lot of things going on, and I think you're going to see more distribution to offset transportation costs, more distribution points around the country to offset transportation costs. We're seeing some of the production start to move back. to North America and Central America, which I think will lead to more suppliers needing space here. So as Jim indicated, a lot of tailwinds in our back right now. Yeah, but I would just add just one other point. Even the impact of the incident at the Suez Canal, and while that doesn't necessarily impact logistics and shipping to the U.S., it just reinforces the need for these major companies to have additional safety stock because of the vulnerability we all have given incidents that can happen anywhere in the globe. So this is not a passing trend. This is something that we're going to deal with, you know, obviously very positive for our sector, but you know, for the next two to three years.
spk04: Yep. Okay. And then just one other one on dispositions. I know you already talked about pricing, but could you talk about buyer types in the market? are you seeing anything interesting as far as like a shift in domestic versus international or investment firms versus peers, you know, things like that?
spk13: Yeah, this is Nick. We have seen a change there. Obviously a lot of the normal usual suspects we see in the, the bitter pools, but we've also seen a lot of new names pop up. Some of them are high net worth family offices and, Some of them are sovereign-based, Spanish, Latin America, what have you. You know, some of them are rotating, or a lot of these are rotating out of other asset classes into our asset class. So there is an increased investor base that's looking for these assets and these bidder pools, for sure.
spk07: Okay, great. Thank you, guys.
spk10: Thank you. And next, we go on to the line of Jason Idoin. Please go ahead.
spk08: Hey, good afternoon, guys. Just touching on one of the points I just brought up. So you talked about some of the repatriation that could happen with manufacturing and production, and people bringing some of that back to the United States, I guess. Is that activity picking up significantly, or how has that been trending more recently?
spk16: Yeah, Jason, this is Steve. I think we're starting to see some of that. Obviously, that takes a long time when you're talking about changing production from from China to other locations. But you're starting to see some headlines. I know Walmart had a recent announcement about some of the production they're trying to bring back. And it may not be manufactured of goods, but the way goods are assembled, the way they're packaged, coming back, reshoring. So I know northern Mexico, we don't operate there, but obviously our Texas folks and California folks deal with it. goods coming in from there. That activity has been pretty significant. You talk to some of the folks in those markets, and that activity is starting to hit in northern Mexico right now.
spk10: Thank you. And if there are any additional questions, please press 1-0. And there are no more questions in queue.
spk15: Thanks, Don. I'd like to thank everyone for joining the call today. We look forward to engaging with many of you throughout the rest of the year. Don, you may disconnect the line.
spk10: Thank you. And that does conclude our conference for today. Thank you for your participation and for using AT&T Conference and Service. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-