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spk18: 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. Instructions will be given at that time. You should require assistance during today's call. Please press star then zero. As a reminder, today's call is being recorded. Now to the counselor of our host, Ron Hubbard. Please go ahead.
spk06: Thank you. Good afternoon, everyone, and welcome to our fourth quarter and year-end earnings call. Joining me today are Jim Conner, 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 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, 2022, and we assume no obligation to update or revise any forward-looking statements. A reconciliation of the gap of the non-gap 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. Now for our prepared statement, I'll turn it over to Jim Connor.
spk09: Well, thanks, Ron, 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 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 an all-time record 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 7.7 million square feet of development projects in 2021. We renewed 75% of our leases, or 90% when you include immediate backfills, We attained 35% gap rent growth and 19% cash rent growth on second-generation leases for the first year, respectively both all-time records for us. We took the same property NOI on a cash basis at 5.3%. We placed $1 billion of developments in service that were originally 39% leased at start dates but are now 90% leased with a value creation of 69%. We commenced $1.4 billion in new developments across 33 projects, which was another all-time record. 61% of those projects were in coastal Tier 1 markets. We completed $1.1 billion of property dispositions and $542 million of acquisitions. We raised $950 million in green bonds with 10-year terms and an average coupon of 2%. And we increased our annual common dividend by 8.9%. 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.
spk10: Thanks, Jim. I'll first touch on overall market fundamentals. Fourth quarter demand was exceptional in the logistics sector. with 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 3.2%, 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 in 2022, with nationwide market rent growth on average expected to be around 10%. The reaction to 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 that 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 estimate about 65% of the current supply pipeline is not located in our sub-markets. 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 122,000 feet. Rent growth for the fourth quarter leasing was, again, very strong at 21% cash and 41% gap. We expect growth in rents on second-generation leasing for the foreseeable future to be very strong. In our portfolio, we estimate our lease mark-to-market to be 39%. Turning to development, we had a tremendous quarter of 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 1 markets, and six of the nine projects were redevelopments of existing site structures. Our development pipeline a year in totaled $1.4 billion. This pipeline 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 is very strong, and our land balance at year end totaled $475 million, with an additional $173 million of covered land plays. Our current land holdings are above our levels in the last few years and consistent with what we've recently communicated, as much of the land acquired late in 21 has been under contract for several quarters. Ninety-four percent of our land balance is located in coastal Tier 1 markets. We own or control land that can support roughly a billion dollars 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 owned this land for about two years. Our favorable land value will continue to support high development margins and very good long-term IRRs. We believe we are very well positioned to continue to lead lead the logistics sector and growth through new development. With that, I'll turn it over to Nick Anthony to cover acquisition and disposition activity for the quarter.
spk20: Thanks, Steve. During the quarter, we closed on $206 million of billion acquisitions, most notably a 470,000-square-foot property in northern New Jersey in an off-market transaction, as well as three facilities in Southern California totaling 134,000 square feet. As noted on the last call, early in the fourth quarter, we sold a recently completed project in Columbus, Ohio, which was 100% leased to Amazon, generating proceeds of $80 million. I would point out that this transaction was placed under contract in April of 2021 as part of a forward 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 1 exposure to 43% of NOI and overall Tier 1 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 was $269 million. 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 earnings results and balance sheet activities.
spk07: Thanks, Nick. Core FFO for the quarter was $0.44 per share compared to Core FFO of $0.46 per share in the third quarter and $0.41 per share reported for the fourth quarter of 2020. Core FFO decreased slightly from the third quarter of 2021 as we executed a significant volume of asset dispositions during the third quarter and did not fully redeploy the proceeds until late in the fourth quarter. Core FFO was $1.73 per share for the full year 21 compared to $1.52 per share for 2020, which represented a 13.8% increase. FFO as defined by NAERI was $1.65 per share for the full year 21 compared to $1.40 per share for 2020. AFFO totaled $589 million for the full year 21 compared to $517 million in 2020 and $148 million for the fourth quarter of 21. Our annual results represented a 11.6% increase to AFFO on a share-adjusted basis compared to 2020. Same property NOI growth on a cash basis for the three months and 12 months into 12-31-21 was 5.2% and 5.3% respectively. I would like to point out that we continue to generate substantial NOI and FFO 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. Same property NOI growth on a net effective basis was 3.9% for the fourth quarter and 4.5% for the full year of 21. As Nick mentioned, we closed on the third tranche of our contribution to our JV with CBRE Global earlier this month. We'll use the proceeds of this contribution along with mortgage financing proceeds received from the JV, both of which total just over $300 million, to fund the redemption next month of our $300 million 3.75% 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 the range for 2022 core FFO per share of $1.87 to $1.93 per share, with the midpoint of $1.90 representing a 9.8% increase over 21 results. We also announced growth in AFFO on a share-adjusted basis to range between 8.4% and 12.3%, with the midpoint of 10.4%. Same property and OI growth on a cash basis is projected in the range of 5.4% to 6.2%. 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 expirations, we typically release significantly more than has contractually set to roll with some pull forwards of future expirations. For instance, a year ago, our expiration 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, and we have targeted assets with long lease terms and low annual rental escalations in our disposition strategy for the year. Development starts are projected in the range of $1.2 billion to $1.4 billion, with a continuing target to maintain the pipeline at a healthy level of pre-leasing. Our 22 development plans include a significant component of specular projects in coastal Tier 1 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 specific assumptions and components of our 2022 guidance are available in the 2022 range of estimates document on the investor relations website. Now I'll turn it back over to Jim for a few final comments.
spk09: Thank you, Mark. In closing, I'd 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 the year expectations. As we look ahead into 2022, all of the demand drivers remain exceptionally strong. Demand is expected to roughly equal supply this year, which bodes well with our continued record low vacancy, strong pricing power to drive same property on a wide growth. We'll continue to see the added value created by our dominant development platform. As Mark noted, the midpoint of our FFO and AFFO 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 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 the level of success we have. I also want to thank all of our investors for their continued support and the recognition of our good stewardship of their invested capital. Now we'll 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 1-0. Okay? Operator, we'll now take questions.
spk18: Thank you. And as just another reminder, if you do have a question for today's conference, please press 1 then 0 on your touchtone phone. Our first question will come from the line of Nick . Please go ahead.
spk03: Thanks. Hi, everyone. In terms of the development starts, maybe you could 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 the thought process there, and what would be a situation where you would get even more comfortable increasing your development starts?
spk09: Thanks, Nick. I'll start off, and then Steve can give you some color. I would say it's two things. You know, we've always had a solid build-a-suit pipeline, and I think if we can continue to do a number of those large build-a-suits like we have, I would see us 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 give us reason to raise guidance. I don't know, Steve, if you have any additional color you want to add?
spk10: Yeah, Nick, I would just say, I mean, you know, you look back at last year, you know, our budget going into the year was in the $850 million range. We did $1.4 billion. I mean, we, you know, we had a very strong year in 21. I think heading into 22, we feel very good about our prospects, but You know, part of it is getting our, you know, the right sites entitled and getting them started. So, you know, the demand picture is strong. It's more about, you know, being able to find the opportunities to get them started.
spk03: Okay, thanks. Just to follow up on the development pipeline and the margin that you're citing, you know, how should, which went up, you know, versus last quarter, cap rates down. But, you know, yields compressing a bit on development, new starts. I mean, how should we just think about that dynamic going forward about, you know, where cap rates can move, where development yields are penciling out over the next year?
spk20: Hey, Nick, this is Nick from Secretly. You know, 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'll continue to help us achieve the above normal margins that we've been achieving historically.
spk07: Yeah, and I would just point out, Nick, that a little bit of the decrease in the stabilized yield in the pipeline from last quarter to this quarter, it's really a market mix situation. You know, we placed some assets in service that were in lower barrier markets with higher yields and replaced that with new developments in, you know, more coastal markets that the initial yield may be a little lower, but it's still a market mix. The value that we're creating actually went up.
spk20: Yeah, and I would tell you on cap rates, I mean, even though We still have not seen any increase in cap rates, even with interest rates going up. There's still very strong investor demand out there, and we expect that to continue for the foreseeable future.
spk03: Okay. Thanks, guys. Appreciate it.
spk18: Our next question, then, will come from the line of Jamie Fieldman. Please go ahead.
spk01: Great. Thank you. I know you touched on it a little bit, but... Can you just talk more about the kind of big picture supply story? I mean, you see some of the projections coming out of the brokerage firms in the 400 or 500 million square foot range for the U.S. this year. Just how should we be thinking about the risk of the cycle ending early or just the exposure in your markets or just thinking about the largest pieces of that?
spk09: You know, Jamie, we see the same data that you do, and we've been hearing these same stories for the last several years. And I think there's a pretty substantial disconnect to this projected supply number and actual annual completions. And, you know, 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 building materials, the rising cost of land, the increased level of difficulty to get sites entitled and out of the ground is placing, if you will, an artificial barrier. damper on new supply. So while everybody's saying supply and demand will be equal, I wouldn't be surprised if we were here a year from now and we'd had another year like this where demand exceeded supply simply for those reasons I cited earlier.
spk01: Okay. And then we keep hearing about, you know, for the supply we're seeing or that's being built is some of it's in more tertiary submarkets. What's your thought on that being competitive or putting pressure on rents in your portfolio or for your development projects? Are you seeing a real difference in pricing across different submarkets in the same market?
spk10: No, Jamie, I'll start. I'll start. I would tell you, you know, we're not seeing big variations between submarkets in the markets we're in. I mean, when you look at the under-construction pipeline. I mentioned that 65% of it is not in either markets or sub-markets we operate in. Phoenix is an area that's got a lot of construction going on right now. We're not in that market. Greenville, Memphis, San Antonio, a lot of these markets that we don't own property in that have big supply numbers. In terms of the Markets that we own property in, the 19 markets we're in, I would say Houston is probably the one that, you know, we've talked about on a number of these calls that continues to be a little soft and not one that we will be starting to build in anytime soon.
spk01: But I guess even within the markets you are in where there is supply, you think rents are kind of constant across sub-markets?
spk10: Yeah, I mean, it varies, right? You've got, it's jumping all over, but you've got, no, I mean, in markets we're in, we're seeing strong rental growth. I mean, obviously, we've put up record numbers for ourselves this year. You know, I think we went into this year, into 21, thinking that market rent growth in the U.S. was going to be in that, you know, mid-single digits to maybe pushing double digits, and we were wrong again, and it ended at 11%. And I think it set up to do the same thing in 22. Okay.
spk01: All right. Thank you.
spk18: Our next question will come from the line of Keebin Kim. Please go ahead.
spk13: Thanks. Congrats to another great year. I just wanted to stick with the development topic, you know, with the 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're actually projecting to start on is lower than the dollar value. So can you just talk about that part of it and what yields you're expecting for your 2022 start?
spk10: Go ahead, Steve. Sure. You know, it does depend on where we end up in that range, right? But I think it's safe to say that we'll do somewhere between, you know, 8 million to 10 million square feet of new development starts as Jim or Mark 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 we want to take on. And in terms of returns, our stabilized returns, again, I think will be a little dependent on market mix, but assuming we're consistent with you know, 60 to 75% in our high barrier markets. You know, I think the returns in the low five stabilized is probably a reasonable expectation. And I think our value creations, you know, considering where cap rates are, are still going to be healthy as they are today.
spk07: Yeah, the only other thing I would point out, Keevan, is you're right on. I mean, I think, you know, if you do theoretically the same dollar value development This year that you did last year on a cost per square foot basis, it's going up, right? So you're probably developing less square feet because costs are going up. But part of it is also market mix once again, right? We're going to do smaller buildings per say per dollar per square foot in these coastal markets, which is where more of our development continues to take place.
spk13: Gotcha. And a separate topic. Uh, where do you think we are in terms of the infrastructure build out to support e-commerce growth? Uh, and I'm curious if you think 2021 was a kind of pull forward demand year and if the next couple of years look a little bit more normalized.
spk09: Well, let me, Let me answer both of those. We've been asked a number of times in a number of different ways about how the infrastructure bill and infrastructure spending is going to help. And I've told people that I think you have to exercise reasonable expectations. And the best example I can get is, remember, we talked about the expansion of the Panama Canal for years. And 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've got to get projects approved and funded and started before you're going to see that. So I think it'll be several years before we'll see the full impact of that. So I think that was the first question. And what was the second part of your question, Keevan?
spk13: So I was actually talking more about the warehouse network build-out for e-commerce, not the infrastructure bill, and where we are in terms of innings. And if you think 2021 was like a pull-forward year where maybe 22, 23 looks a little bit more normalized.
spk09: Well, I would tell you, I think we believe 20 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 21 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. you know, for e-commerce retailer as well as, you know, our traditional customers like FedEx and UPS continue to grow dramatically. So I think we're in the early innings. I think you'll continue to see some ups and downs with, you know, with different aspects of business, but I think we're going to continue to see that sector grow at a very healthy rate.
spk13: Okay, thank you.
spk18: Our next question, it'll come from one of Dave Rogers. Please go ahead.
spk16: Yeah, 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 we've all touched on it a little bit, the investment guidance is much more conservative, lower acquisitions, lower dispositions, lower development starts than 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 it. So, I guess I want to understand, is there something that you're worried about? Do you have the ability to take development starts to $1.7, $2 billion with the combination of land, entitlements, labor, you know, steel? Or are there some natural barriers right now that you're coming up against in terms of being able to invest more capital more aggressively given the low vacancy rate?
spk09: Well, let me start off and then others can chime in. No, we're not. We don't have any barriers. You know, 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, you know, those possibilities exist. As I said earlier about the development pipeline, you know, it's a function of some of the bigger build-a-suits and how many of those we sign during the year. that would push us towards the higher end of guidance or to exceed our initial guidance, much like we did last year. And then it's continued leasing volume and the ability for us to accelerate more speculative development in most of those markets. We've ramped up our land holdings to support a significantly larger development pipeline going forward. And I think we've indicated that we're going to continue to be actively buying land. No, we're not. There's no hidden message. We're not managing. You know, I think this is probably pretty consistent, you know, good, strong, but prudent guidance. And, you know, I hope to have the opportunity to tell you over the course of 2022 that we intend to raise guidance a few times.
spk07: Yeah, David, I would just add to your specific point on asset sales to pay the debt off that I did refer to. That's really a temporary thing. It's not like we went out and sold assets to pay back debt or to 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. 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.
spk20: 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 like $530 or $540. You know, acquisitions are tough. It depends on what the opportunities are. And frankly, the majority of our growth is going to be through development because we like the risk-adjusted returns there better than the acquisitions.
spk16: 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 points 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 skew as well. But can you talk about that spread in 2022, you know, and maybe kind of what that normalized looks like at Amazon?
spk20: Yeah, I think those spreads will continue to be about the same. What I would point out, though, is The total returns or the IRRs, the spreads have expanded in the last 18 months. And for 2021, we calculated the spread at about 250 bps, that our acquisition IRRs were 250 bps higher than our disposition IRs.
spk16: Great. That's helpful. Thank you.
spk18: Our next question will come from the line of Catalin Burrows. Please go ahead.
spk14: Hi there. I guess good afternoon. I guess as you guys look at occupancy at the end of the year, almost 98% 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, but how occupancy that high makes you comfortable that you are indeed getting the strongest rent growth and same-store NOI growth possible.
spk07: Well, I'll start, Kalen. I mean, I 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 wouldn't you want a lot of occupancy too? You know, I think I just go back and you look at our rent growth that we posted, and I think we'll be, you know, at or near the top of our peer group. So as long as we're, you know, posting rent growth numbers that are at or near the top of our rent growth, peer group, I'm sorry, Having high occupancy levels is a good thing. You know, 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 21 to 22. And, you know, be in that kind of low to mid 98% range. And that's really what we're projecting. We don't have a lot of expirations, like I pointed out in our prepared remarks, but we will likely roll more of our portfolio than what's expiring, but that doesn't do anything to the occupancy, right? It's just keeping tenants in there and it's getting to that rent stream even quicker.
spk14: Got it. And maybe just a quick follow-up on kind of leasing trends. I know last quarter you guys gave some impressive stats on how leased spec properties were when they went into service at 90% and that the average lease-up time since 2019 of your spec developments had been under two months. from having been placed in service. So just wondering, um, I know it's only been a quarter, so they don't move that drastically that quickly, but I'm wondering if you have any reason to believe that that lease of timing could begin to take longer or if that's just.
spk07: No, I would say as we sit here today, it's still, we're pretty much right on the timing, I guess, that we've been at the last, you know, 12 months. Like if you look, for example, at the deliveries this quarter, they were 71% at least when they went into service. But they were actually 39% leased when we started this project. So, you know, we almost, you know, kind of almost doubled the occupancy, if you will, before they were even placed in service. So we still continue, especially in markets like Southern Cal and Northern New Jersey, to lease most of these projects up before they even go on service. So, you know, in those markets, you're looking at zero to two to three months of lease uptime 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 quarters, I think it's going to look very similar.
spk09: Yeah, the other metric that we point to is we've got in the portfolio a little under 6.5 million square feet of vacant space, 75% of which is not in service yet. So, you know, I think that speaks to the strength of the leasing activity that teams are seeing all across the country and the, you know, the opportunity for continued outperformance in that area. Yep.
spk14: Got it. Thank you.
spk18: Our next question will come from Ronald Camden. Please go ahead.
spk19: 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 you're posting, obviously the rent bumps are what they are, potentially some occupancy tailwinds. When you think about why not higher, is it mostly because there's fewer leases rolling, as you mentioned, or is there anything else with free rent or anything else we should be aware of that maybe is keeping that number a little bit lower?
spk07: No, it's really role. I mean, you know, if you look at what I call deal quality, the rent growth we're getting, you know, the overall rates we're getting on deals, I'll put our deals up against anybody. I think our deal quality is as good or better than anybody, any other appears out there. We do have less roll. I mean, that's a fact. I mean, so you've got to look at, on a risk-adjusted return, we're very happy with the guidance we put out. But, you know, the other thing I would just tell you on roll, like I mentioned, my prepared for 21. We were supposed to have 7% of our leases roll. We actually rolled 12. If you look at 22 that's in our supplemental, we're showing 5% roll. When we're all said and 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've got to remember a lot of the 22 same property growth will come from the 21 leases we sign. And only part of 22 will come from the 22 leases we sign. Some of that will affect 23. So if you average 21 and 22 together, we're going to call it roll 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 add the rent bumps to that that are embedded in our portfolio, that gets you up close to 5%. Our guidance is close to 6% because the difference would be, you know, occupancy, free rent, things like that. So hopefully that kind of walks you through.
spk09: Yeah, the other thing I would add, Ron, is the upside for us is, you know, what leases we can get our hands on early, quite candidly. And, you know, at this point early in the year, I don't think Steve's guys across the country have a real good idea all of the total amount of leases we'll 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 on how many we can pull forward will, I think, really dictate how close to the upper end we can get.
spk07: And then the last point I would make, circling back to, I think it was Dave Rogers' question and Nick on dispositions and maybe being a little higher, the assets that we have targeted for disposition are, Our assets, quite frankly, we think we've really maximized the value on them. There are some of our assets that had longer-term leases in 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 value, and it really just helps our same property pool looking forward, more into 2023. those kind of items will be more of an impact on 23. But we continue to get those lower growth assets out of our portfolio and replace them with higher growth assets.
spk19: Great. And then just if I could sneak in a quick one, just on the wage expenses, maybe can you talk about sort of what you're seeing on the ground with sort of the constructions and so forth, what you're hearing from tenants, Any number you could throw around it, is it up 7%, 8% year over year, would be really helpful. Thank you.
spk10: Was that question on wages for warehouse workers or construction costs?
spk19: For warehouse workers, yeah. Thank you.
spk10: I think it varies by region, but you've probably seen a 10% to 20% increase in some wages, depending on the areas. You know, I mean, look, our customers, I think Caitlin asked a question earlier about these conversations with tenants. And, you know, this is a conversation that Jim has with the operating teams quite often, which is are we pushing hard enough? And our customers are under a lot of pressure from a bunch of different points of their business, right, between transportation costs are up significantly, wages are up. You know, rent continues to be a relatively small part of the overall logistics cost. So, you know, they're facing quite a few inflationary challenges out there, but rent continues to be a small part of it.
spk19: Thank you.
spk18: Next question will come from one of Emanuel Corshman. Please go ahead.
spk02: Hey, guys. This is one for, I don't know, a combination of, I guess, Steve and Mark. You spoke about the 2021 pullback, or not pullback, but the early renewals, and then 2022. A couple questions. When you signed leases earlier, 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 sort of lie, but do the new rents become effective at the end of the lease or mid-lease because you're doing them early?
spk07: Yeah. It varies, Manny. Generally, they don't take effect until the current lease ends. There are some exceptions to that, but generally, they don't take place until the new lease ends or the current lease ends.
spk10: Yeah, I would agree. I would say the one exception, Manny, is some of these conversations that take place around the tenant's needs, 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 75% of them have to do with natural expiration.
spk07: 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 we're expected to roll in two or three years from now. These are generally six to nine months early.
spk02: Hey, Jim. Right, but Mark, I guess the point I'm making is you talk about the big benefit to cash flow from doing them early, but from a model perspective, from a cash flow perspective, the fact that you've signed them early and they're in your leasing steps doesn't really impact cash flows, right? So your 2022 at this point is still going to, your natural lease expiration in 2022 is going to be about the same because you've just done them 69 months early, right, from a cash flow perspective.
spk07: You're exactly right, but that's why I said you really need to average a couple years together because what I was trying to say is the impact of a lot of the leases we signed in 21 hit us now in 22. So that's why you need to really take a couple years and average them together. You're exactly right.
spk02: And then I think you mentioned 20% cash rental rate growth when we do that average. Is 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 where those numbers fall out?
spk07: Well, I think what we would say is we expect, as we sit here today, we expect 22's rent growth numbers to look very similar to 21, which is called in that mid to high 30% on a gap basis and high teens to low 20 on a cash. So, yeah, it's right in that area. And I think Michael had a follow-up.
spk21: Hey, Jim, it's Bill. I'm just a question as you think about longer-term strategic planning and Has 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, but going deeper and then thinking about helping your tenants. You look at what Prologis is doing in their essentials business. Does any of that start to rise up higher in your strategic thinking?
spk09: Those are all topics that are consistently debated in our strategic planning efforts and at the board effort. And, you know, we're not prepared to announce any of those, but, you know, they're all in the mix and they're all certainly things that we're talking about today. You know, they're all things that, given, you know, our size and scale, are opportunities for us.
spk21: So it sounds like I don't know if you're able to rank those three things, global, asset management, and essentials. which one of them would be closer to potentially going forward? I think your comments in the past have been, you know, you want to be a U.S.-focused company. That's what distinguishes you relative to the peer set. You know, you don't want to become a massive asset manager. You want to sort of do small, you know, 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.
spk09: And I appreciate that. No, I think you're correct. The opportunity for goods and services for our customers is very attractive, and I think that presents an interesting opportunity. Back to your original two, international, I would say sitting here today, we think we still have ample opportunity to grow in the U.S. markets. 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 have You know, 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 do some of these ventures. I think it'll be a while before we're willing to take a big, big step and get purely into the third-party asset management business.
spk02: Okay. I'll see you in Florida.
spk09: Looking forward to it.
spk18: Our next question will come from one of Vince Tabone. Please go ahead.
spk15: Hi, good morning. How are you thinking about selling individual assets versus a portfolio deal? Are you seeing any differences in pricing or investor demand for single assets versus larger portfolios?
spk20: Vince, this is Nick. Everything's very expensive. From our perspective, specifically on the acquisition side, we almost exclusively, most of the transactions that we're actually on, are lightly marketed or off-market transactions. The reality is most of the portfolio deals are going to be fully marketed. We look at them off-market and lightly marketed as well, but it is very challenging on the acquisition side right now. Fortunately, we've got a good team in place that's leveraging the local development teams to go find some of these deals interesting infill assets that we can buy at pretty good yields.
spk15: But what about on the sell side? I mean, do you think there's a portfolio premium today for, you know, a combination of assets and just so many institutions looking to get into the sector? Or is it still, you know, selling single assets kind of gets you the same overall execution as a bigger portfolio on the disposition side?
spk20: That's always a tricky question, but I would answer is yes, there is a portfolio premium on the disposition side. You saw us do that on several transactions last year. You know, the reality is because investor demand is so strong, when you can get a bigger portfolio pool 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 really push pricing on some of these bigger deals.
spk15: It makes sense. That's helpful, Collar. 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? 2X.
spk07: Yeah, I think that we quoted that in our prepared remarks, too. Vince may not have been clear up on that. But, yeah, we think it's 2x what the book basis is. What you've got to keep in mind is a lot of this land we've just recently put on our balance sheet has been under contract in some cases for, you know, 9 to 12 months. And market values have moved quite a bit in 9 to 12 months. Got it. Thank you.
spk18: Our next question will come from Rich Anderson. Please go ahead.
spk04: Hey, thanks. Good afternoon. So, you know, I was looking at the same store projection for 2022 at midpoint, 5.8%, same store on a Y. That's a different approach than what you've done in past years. In 2020, you started at four and then ended the year at five. In 2021, you started at four and ended the year at 5.3%. I'm curious if, given the fact that occupancy is so elevated, do you really see that there's upside to the 5.8 in a similar manner that you've been able to produce in previous years, or do you think that's kind of a full number at this point, given all those inputs and outputs?
spk07: Well, I would answer it this way, Rich. We're comfortable with the guidance we gave, which does have, you know, some room above the 5-8, the 5-8 is the midpoint. The guidance goes all the way up to, what is it, 6-2. So I would tell you that, yeah, there's definitely, you know, some fuel in the tank, so to speak, to get to that 6-2. I'm not prepared to sit here this early in the year and tell you we're going to get there, but there is a path.
spk04: Like 105%? I'm sorry, Rich? No, never mind. I said like 105% occupancy, but I was obviously kidding.
spk09: We're trying. I'm telling you, we're trying.
spk04: 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 position to be in. But since demand can shock and turn off much faster than supply demand, At what point does that balance get you nervous in the sense that, okay, if supply is running X percent above demand in the national view, do you as a company start to take a more cautious approach to your own development process?
spk09: Yeah, Rich, I think we would. But I think here's the fact of the matter. U.S. vacancy is 3.2%. If it goes up 100 basis points to 4.2, that's where we were in 2019, and we had a pretty good year in 2019. You know, not quite as good as 2021, but, you know, I think any time you've got U.S. vacancies under 5%, it's a landlord's market, and you'll continue to see us be able to put good value creation on the development side, both from bill to suit and SPAC, and continue to grow rents.
spk04: Right. And just a quick, quick follow-up on the same topic. In northern New Jersey, we're seeing a big spike in demand, and perhaps no surprise, they support Manhattan as well, of course. But is there anything unique going on in northern New Jersey that you're seeing that is particularly sort of eye-popping right now, or is there just sort of typical good dollar performance?
spk09: No, I think, Steve, you can talk about, our demand is pretty much broad-based. I mean, I can't tell you there's one phenomenon in some industry that's driving it. Steve?
spk10: Yeah, Rich, I would just tell you, I think the biggest thing happening around, you know, any of these large population centers is, you know, I think that the whole e-commerce phenomenon and online economy is translating to our business, right? So, you know, there was a question in earlier about where we are and what ending, and You know, I think Amazon might be in one ending and everybody else is, you know, sort of just getting done with warm-ups, right? So I think that's a big part of it. I think, you know, northern New Jersey in particular with the demand side is, you know, the assets that are needed today, you know, they're more modern assets for e-commerce fulfillment and they don't have that in northern New Jersey. And so you're seeing, you know, the lack of opportunities For greenfield development, you got a lot, you know, as 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 as the lack of available ready-to-go opportunities.
spk04: Yeah, I mean, after all that, I know that 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.
spk18: All right. Our next speaker, then I'll come from the end of Mike Mueller. Please go ahead.
spk05: Yeah, hi. Just a quick one. I'm curious, how did the bumps that you achieved with your 2021 leasing compare to the overall portfolio average?
spk07: Our portfolio average is up now, Mike, right at 2.8. And the bumps that we did in 2021 leasing were just over three. So they continue to go north.
spk05: Got it. And then... I think earlier in the comments talked about a rent forecast, rent growth forecast is about 10%. How did the Tier 1 coastal markets compare to that overall 10% average?
spk10: I think you'll see the Southern California, Northern California, Northern New Jersey, probably 3x that. The Inland Empire is at a half a percent vacancy right now. I mean, those numbers are astounding. You know, the proposals we're quoting, you know, our activity and our new development pipeline is up significantly. And, you know, we're quoting proposals today with an end date, a very near-term end date that we need to get a response on because of how quickly rents are changing in those markets. Got it. Okay. Thank you.
spk18: Our next question, I don't come from a bill crawl, please go ahead.
spk08: 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, is contemplating pushing up exit cap rates?
spk20: This is Nick. No, I don't think so. Now, I will tell you, when we do our IR analysis, we do have a 5% annual bump in our projections annually, but that's been pretty consistent over the years. The reality is on our development projects, you know, we price the exit capital based on comps that are out there right now in the market. And, yeah, I know interest rates have moved up a little bit, and that has some correlation to cap rates. 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's going to continue to keep a cap on cap rates going forward.
spk08: All right. And I want to throw one in from left field here, which is there was a little bit of attention focused on the industrial sector when we had the tornado disaster in the Kentucky and Indiana area. I'm just wondering whether there's been any follow-up discussions with tenants, or as you think about developing new buildings, whether there's any change to the structure itself that anybody's contemplating?
spk09: No. Well, Bill, I'll tell you yes and no. Look, building codes change virtually every month across the country. And, you know, we're building state-of-the-art buildings to the top codes. We deal with... Earthquake issues and engineering around that. We deal with hurricane issues in, you know, in Texas and South Florida and eastern seaboard. So, you know, that's just a constant evolution. And our construction and development people deal with that every day.
spk08: Okay. All right. Thanks. That's it for me.
spk18: Our next question comes from Anthony Powell. Please go ahead.
spk12: Hi, good afternoon. It's a question on the long-term development start outlook. You know, some of your peers have given either targets as a percent of enterprise value or 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?
spk09: Well, Anthony, I guess I would tell you that it's consistent with the FFO 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 development guidance in the range that we've given this year, the levels that we were at last year. Pre-pandemic, we were well above a billion dollars once before. So I think we're pretty comfortable committing that we can continue to operate at this level.
spk12: Thanks. And I've seen more macroeconomists call for or predict an inventory glut first half of this year as people restock, which could impact, I guess, the inventory-to-sales ratios that you and others quote. Do you worry about that? And if that were to be the case, what do you think it would do to medium-term demand growth?
spk09: Well, our customers would love to get their IS ratios back up. You remember, that number typically operates between 1.4 and 1.5, and that doesn't take into account you know, the safety stock or the increased inventories that a lot of our customers are trying to build up. So you can extrapolate from where the IS ratio is today, and you're 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's trying, I think it's, you know, the supply chain issues are here for, you know, well into 2023. So it's going to take us a while.
spk12: All right. Thank you.
spk18: Next question will come from Vakram Mahatra. Please go ahead.
spk17: Thanks. Just two quick ones. Just with all the rent growth that you've outlined, where is portfolio mark-to-market today?
spk07: 39% on a net effective basis and 29% on a cash basis.
spk17: 29% on a cash. Okay, thanks. And then just where would I – I'm not asking you to give 23% guidance, but if I were to sort of hypothesize and say – rent still growing, mark-to-market widening, occupancy flat. You arguably have maybe even more to release next year. Why wouldn't same-store NOI growth accelerate from current levels next year? Where would you say I'm wrong?
spk07: Vic, you broke up there. I didn't quite get that question. Could you repeat that, please?
spk17: So I was saying that... If you look next year, you have more to lease. I know you do a lot of forward leasing, but just optically there's more to lease. Rent growth is still there this year, so arguably the spreads versus market like you just outlined on a cash basis are higher than what you're achieving today. So why would same-store NOI growth not accelerate next year versus this year? Where would I be wrong with that statement? I'm not looking for a specific number.
spk07: I'm just trying to figure out... We haven't given that guidance yet, Vic, but I don't see anything wrong with that statement. So it's your statement, but I don't see any problem.
spk09: Vic, that is a crack for me. Anybody who's ever asked us about 2023 guidance, congratulations.
spk17: Well, I'm the first. No, I was just wondering, you just outlined the cash rent to book or to portfolio market. So it seems like there's room.
spk07: Yeah, no, we're not going to say you're wrong.
spk17: Okay. Thanks so much, guys.
spk07: John?
spk18: And just as another reminder, if you do have a question, please press 1 and 0 at this time. We're going to go to the line of John Kim. Please go ahead.
spk11: Thank you. I was just wondering with your development pipeline becoming increasingly spec, if we should think about the length of the stabilization periods extending at all. I'm looking at this quarter, your completions were 71% at least. I know demand is strong. I'm just wondering, does it take an extra few months to fully stabilize?
spk10: Yeah, I guess I'll start. I'll tell you, I don't know that it'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 be a true statement going forward, but today I don't know that that's necessarily true. And I don't think our stabilization will change much. Our leasing has been strong in our portfolio, and we've been leasing them on average two months after they were put in service. And given the pipeline today of prospects, I wouldn't see that changing for us.
spk11: Okay. Okay. And my second question is on Amazon and their strategy to own more of the real estate. Are you seeing a notable shift in your markets as far as buying or leasing activity? And do you think other retailers or logistic providers are going to follow suit and decide to go this route?
spk10: 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 20 and then down to 21. I think in 22 we'll be down a little bit more. But that was a good thing. That was a 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 1,300 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 and areas that we're not necessarily going to compete with them in. You know, some of these G plus fours that are out in tertiary locations. You know, but we have, look, we haven't had Amazon buy any of the assets we've sold with them in it. They've had an opportunity to do that. So I don't, you know, I can't speak for them, but I don't, We haven't seen it compete with us in any market. And in terms of other customers, not anything we're hearing from anyone trying to follow in any sort of footstep of Amazon.
spk11: Okay, great. Thank you.
spk18: Thank you. And at this time, we have no further questions in queue.
spk06: Thanks, Sean. I'd like to thank everyone for joining the call today. We look forward to seeing many of you throughout the year at various industry conferences, as well as hopefully getting you out to physically visit some of our regional markets. Thanks again.
spk18: Ladies and gentlemen, that will conclude our conference for today. Thank you for your participation. If you're using AT&T event services, you may now disconnect.
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