Duke Realty Corp (DRE) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Duke Realty quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Rhonda. Good afternoon, everyone, and welcome to our second-quarter earnings call. Joining me today are Jim Connor, President and CEO; and Mark Denien, Chief Financial Officer.

Before we make our prepared remarks, let me remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you to our December 31, 2015, 10-K that we have on file with the SEC.

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

Thanks, Ron. Good afternoon, everyone. I'll start out with an update on the overall business environment and our second-quarter results. Nationally, the industrial markets' momentum continues to be very strong. Demand outpaced supply for the 25th straight quarter. New supply in substantially all markets is in balance, and demand for modern bulk space year to date continues to beat expectations.

Net absorption for the second quarter was 64 million square feet, and year-to-date absorption is 124 million square feet. New supply in the second quarter totaled 35 million square feet, resulting in another 10 basis point drop in vacancy nationwide to approximately 5.2%. Our outlook is for these fundamentals to continue to be favorable for the remainder of 2016.

We are seeing similar strength in our own portfolio with the completion of 6.9 million square feet of leasing for the quarter. This drove our in-service occupancy up to 96.7%, a 100 basis point increase from the first quarter and the highest in the Company's history. Rents on renewal leases for the quarter grew by 18.6% -- also the highest on record for the overall portfolio, reflecting continued strong supply demand fundamentals and our solid pricing power.

Of particular note was our continued success in leasing recently completed speculative projects and the leasing of second-generation space with new tenants within our portfolio. One notable new lease was signed with Amazon for 1.1 million square feet and our speculative project in Pennsylvania that was delivered in the first quarter of the year. Also, we signed two new leases in Indianapolis with R.R. Donnelley and Stryker totaling over 1.3 million square feet.

On the lease renewal side, we executed two leases with The Container Store in Dallas in our Freeport Park near DFW Airport, comprised of a 956,000 square foot lease renewal of existing space and 146,000 square feet of expansion space. In addition, we executed two significant renewal leases with Hewlett-Packard in Indianapolis and GENCO Distribution in Columbus, each over 400,000 square feet. I'll also note that while our renewal percentage for the quarter was 63%, it was impacted by four large expirations that were immediately backfilled with new leases at much better rates.

The largest drivers of leasing in our portfolio continue to be e-commerce, retail and consumer products distribution -- both directly with our corporate clients and indirectly with 3PL clients, as well as positive drivers from the food and beverage industry. In addition, we are seeing most of these customers continue to allocate additional capital to their supply chain and inventory optimization.

Our medical office portfolio continues to have good momentum, with in-service occupancy increasing 20 basis points to 95.8%, another all-time record. And we continue to have a strong development pipeline for future development to go along with our existing pipeline.

Turning to overall development for the quarter, we started $108 million of industrial projects. Given our strong leasing performance, we are allocating more capital to speculative projects in our strategy to grow in Tier 1 markets.

Three of these four development starts are speculative and located in Southern California and Pennsylvania markets -- all the while maintaining our prelease percentage in our overall development pipeline of over 70%.

Our overall development pipeline at the end of the quarter had 18 projects under construction totaling 6 million square feet and a projected $504 million in stabilized costs at our share that were 72% preleased. We expect these projects to create 20% margins and generate about a 6.6% initial stabilized cash yield. Our development outlook is very solid, with a pipeline of prospects -- many of which are build-to-suits -- that will continue strong value creation for the balance of the year.

Our land inventory now sits at $344 million as a result of monetizing about $40 million of land during the quarter through sales and development. This is our lowest inventory level since 2003 and below our 2004 stated goal to maintain the land bank between $350 million and $400 million.

With respect to capital recycling activity, we closed $173 million of building dispositions during the quarter in six transactions. This includes $55 million related to the Gramercy Property Trust joint venture dissolution that Mark will expand on in a moment.

Similar to what we stated on the last call, the majority of our expected dispositions for the full year are scheduled to close in the third and fourth quarters and are proceeding as planned. But we also mentioned that we are under contract to sell our 936,000 square foot vacant speculative industrial building in Indianapolis. This is a user sale and, along with the significant leasing we completed during the quarter, raises our Indianapolis in-service occupancy to 99.8%.

I'd now like to turn it over to Mark to discuss the financial results and the capital transactions.

Thanks, Jim. Good afternoon, everyone. Core FFO per share was $0.30 for the second quarter of 2016 compared to $0.28 per share for both the first quarter of 2016 and the second quarter of 2015. This $0.02 increase is reflective of our continued improvements in our overall operating performance.

NAREIT-defined FFO was $0.35 per share. The largest reconciling item between core FFO and NAREIT-defined FFO was $24 million of promote income recognized related to the dissolution of the Gramercy joint venture that I will expand on in a minute. The promote income is included in FFO as defined by NAREIT but not core FFO.

We generated $0.27 per share in AFFO for the second quarter of 2016, which equates to an AFFO payout ratio of 67% compared to $0.26 per share in the first quarter of 2016 and $0.25 per share in the second quarter of 2015. Same-property NOI growth for the 12 and 3 months ended June 30, 2016, was 4.5% and 3.5%, respectively.

Let me point out that the second-quarter three-month figure was negatively impacted by a few individually small, nonrecurring expense items. These items will have virtually no impact on our full-year results as we look out to the remainder of the year. While occupancy growth should slow a little bit in the latter half of the year, we still expect strong rent growth, which led to our increase in same-property NOI growth guidance of 1.375% at the midpoint.

As I mentioned earlier, we dissolved our joint venture with Gramercy Property Trust, in which we had a 20% interest. This dissolution transaction consisted of seven of the joint venture's buildings being distributed to Gramercy, one industrial property being distributed to us, and the final property being sold to a third party late last week. Two of the properties distributed to Gramercy were suburban office buildings.

Our $173 million of property dispositions for the quarter includes $55 million for our 20% ownership interest in the seven joint venture buildings that were distributed to Gramercy, and our $67 million of acquisitions for the quarter includes $51 million for Gramercy's 80% interest in the industrial property that was distributed to us. Also, as I mentioned earlier, the dissolution of this JV resulted in a $24 million promote fee being recognized in the second quarter.

From a capital raising perspective, I'd like to note that during the second quarter, we received full repayment of the $200 million seller financing that we had extended as part of the $1.1 billion office disposition that we executed in April of 2015.

We executed some significant debt transactions during the quarter as well. We used the proceeds that had been received from the seller financing I just mentioned and property sales to pay off secured loans totaling $330 million that bore interest at an average effective rate of 5.8%.

In June we issued $375 million of 10-year 3.25% unsecured notes, which represent the lowest rate on a 10-year issuance in Company history. In connection with this issuance, we initiated a tender offer that resulted in the repurchase of $72 million of our 5.95% unsecured notes that were due in February of 2017, and we repaid the remaining $203 million of these notes earlier this week. These transactions significantly lowered our overall borrowing costs.

In the equity capital markets we issued 4.6 million shares under our ATM program through July 8, 2016, for net proceeds of $111 million at an average issue price of $24.19 per share. With our growing list of development prospects and in view of the fact that our shares have not traded in excess of our net asset value in quite a while, we thought it was prudent to take some risk off the table and pre-fund some of this highly accretive development. We have only $14 million left in our current ATM filing and plan to re-up the program to be prepared for future strategic and accretive opportunities.

We concluded the quarter with $141 million of cash and no outstanding borrowings on our line of credit. These capital sources, along with the third-quarter property sales, are more than sufficient for the repayment we just made of the remaining February 2017 notes and the funding of our development pipeline for the foreseeable future.

I would also point out that we have only $69 million of debt maturities until our next bond maturity in early 2018. All these capital transactions, coupled with our operational performance, resulted in a significant improvement to our key financial metrics. And we expect to see further improvement for the remainder of the year resulting from the transactions and new income-producing properties being placed in service. This is reflected in our revised guidance.

And with that, I'll turn it back over to Jim.

Thanks, Mark. In reflection of our strong performance for the first half of the year and positive outlook for the second half of 2016, we increased our AFFO per-share guidance by $0.01 at the midpoint. Given the strong outlook on our development pipeline, we also raised our development guidance to $500 million to $650 million, up $75 million from the original midpoint. Also due to continued strong overall operating fundamentals, we raised our same-property NOI growth guidance to 4.25% to 5.5%, up 1.375% from the previous midpoint.

Finally, given our capital recycling activities and our recent debt paydowns, as Mark touched on, we have changed the guidance for all three of our leverage metrics in a positive direction. Details are provided in the supplemental package and last night's press release. We believe these improved leverage metrics put us firmly in a position for a ratings upgrade in the near future.

Revisions to certain other guidance factors can also be found in the investor relations section on the website. In closing, we are very pleased with our team's execution through the midyear and our leasing performance, capital redeployment, and balance sheet management. We're very optimistic about a strong performance for the remainder of the year.

We'll now open up the lines to the audience. We ask participants to keep the dialogue to one question or perhaps two very short questions. And you of course are welcome to get back in the queue. Thank you.

(Operator Instructions) Blaine Heck.

Mark, as you mentioned, you guys were active on the ATM during the quarter with $111 million of issuance on what seemed to be pretty good pricing. But your stock is up almost $4.00 a share from the average price of this quarter's issuance. So can you just talk about your appetite for further ATM issuance when you re-up the program?

Yes, Blaine, you know, if you look at the guidance that we changed for development and acquisitions -- if you combine those, we raised our total investment outlay by about $175 million. So we kind of looked at that incremental $175 million of investment, and where our stock was trading at was a good way to pre-fund that.

So we are really taking care of it both from a balance sheet perspective and, really, everything that we have baked in our guidance through the rest of the year. I mean, certainly we like our stock price better today than we did when we did the deal. So I think we would look at any additional equity going forward as it would have to be to fund incremental investment opportunities above and beyond what's already in our guidance.

Okay, that's helpful. And then just a follow-up: the increase in same-store NOI guidance is pretty substantial, over 1% higher at the midpoint. So can you give us some color on what you're seeing at this point? It's much better than what you had expected in the beginning of the year, whether it's on the rent side, occupancy side, or even expense savings. And was it driven by better execution in the first half of the year or kind of better expectations for the second half?

Quite honestly, Blaine, it's a little bit of everything you just mentioned. I mean, occupancy is better than what we had expected. And that is reflected in the increase in our guidance. Some of that occupancy hasn't made its way into rent yet. We report most of our occupancy on a lease signed basis. So as those leases come online, we do expect rental increases.

Some of the leasing we did early in the year, even late last year, may have had just some minimal free rent or reduced rent in there. That's burning off. So you have rental rate increases, you've got occupancy increases, and then rental rate growth is better than what we expected at the beginning of the year as well.

We reported almost 19% increase in rents this year on a GAAP basis. And as we look forward, about 25% of all of our leases rolling in the next 18 months were signed in that trough period. So we do believe we can continue to grow those into the 20% range. And you couple those with some newer deals, and we still think rent growth is going to look very similar going forward. So I think it's just a little bit of everything that you mentioned that's driving that.

Okay. Sounds great. Thanks, guys.

Brad Burke.

Just wanted to get your updated thoughts on the suburban asset sales that you have planned for the balance of the year: one, whether the pricing and the interest that you're seeing in the market now is in line with what you had expected when you had initially given the guidance for the full year?

And then, two, the guidance that you have for the remainder of the year -- the implied proceeds, is that entirely suburban office at this point? Or would we expect there to be some industrial sales included in that total as well?

Well, Brad, I would tell you that everything is on track. A couple of kind of general comments: I think that buyer pools in general, while they're still deep enough for us to get deals done, are a little shallower than they have historically been. But we are making progress, and we are kind of on track with everything we've got planned for the remaining office dispositions for the rest of the year. So we didn't feel it was warranted to change any of our guidance there.

It's not 100% office. As we talked about, we sold some buildings in Phoenix this year. We sold a couple of buildings in California. I think through our year-end numbers, we are projecting about 70%, 75% of it could be office and about 25% to 30% of it to be industrial, and a couple of one-off. We sold the last of our retail things and a few other clean-up items. So I would say 70%, 75% of it is office.

And just related to that, on my math it's almost $500 million of guidance at the midpoint for the back two quarters of the year for dispositions. So 75% of that -- is it right to think that $350 million to $400 million would be suburban office proceeds? And would that represent the bulk of your suburban office portfolio?

My CFO is sitting next to me is shaking his head. So he confirms your math.

He's shaking yes? Okay, good.

Yes. (laughter) Up and down.

Good. All right. That's it for me, thank you.

John Guinee.

You guys are really rocking and rolling. How the hell did you ever get down to $300 million of land?

(laughter) Well, thank you, John; I'll take that as a compliment. We have talked about this at the last few meetings. You know, we've really changed the culture at Duke Realty. Many of you who have followed us over the years -- you know, we used to love to buy 500-acre farms and turn them into business parks. You know, it's really tough to economically carry land for extended periods of time like that.

So we have a much shorter time horizon on vacant land that we want to carry. We'd prefer to take it down in bite-size pieces and put it into production as quickly as possible.

So as tough as it's been for us to get here, it's really been a welcome change, because the guys that need land can buy land and can put it into production right away. So I appreciate the compliment. It's been a long road getting here from the roughly $980 million we had back in 2008. But we think we're in a sweet spot, and we think we can stay here for the foreseeable future.

All right. Okay, now --. (laughter)

Now the real question?

Yes, one more question. Looking at page 28, looks like you have got a big build-to-suit in Southern California and then a couple 600,000 square feet of spec product. And that's almost half of your stabilized costs of bulk distribution, but you've got -- your yields on these, on the whole page at about 6.3% on a cash basis, what do you -- can you talk a little bit more about where in Southern California these deals are located, and what sort of yield on costs you're expecting in So Cal?

Yes, sure, John. Most of our development in Southern California right now is in the Inland Empire. That large build-to-suit that you referred to is out there, and several of the other buildings -- although we are doing one infill redevelopment project closer in in Orange County.

While those cash yields are down from what you would have historically seen from Duke Realty's portfolio in our either more mature for our Midwestern markets, they're still -- it's a great spread over what the exit cap would be. As you know, pricing in Southern California has reached just virtually record levels. Every deal were seeing today is trading now in the 4s, and some of the exceptional properties are trading in the high 3s from a cap rate perspective.

So even at a 6.3%, we are still creating a tremendous amount of value for our shareholders there if we were to look to monetize that, which we are not. We want to hold and grow that portfolio out there.

Are any of these the Chevron site? Did you win that site? I think it was Chevron. I know it was an oil --.

None of those are the Chevron site. We do have that under contract. And if everything holds, that's probably a very late fourth-quarter or first-quarter start next year.

Okay, keep up the good work. Thanks.

Manny Korchman.

Maybe if we just think back to combining your -- the desire to do equity or the ATM with the -- through the portfolios that are out on the market, especially when your stock's trading at a premium to NAV, do you look at those portfolios now in a different way than you would have before the recent run in your stock price? Maybe how do you balance between the ATM and the larger equity offering?

Manny, I think we'll both chime in on this. We look at every major portfolio that's out there, and most of the smaller ones and one-off deals -- if nothing else, just to be apprised of what's going in the market, what investor activity is, and what pricing expectations are. So we are abreast of everything that's going on, and we have yet to see an opportunity that we think is available at a price that we could demonstrate value creation and really fits in our targeted growth portfolio.

For us, that's the West Coast and predominantly the Northeast, maybe South Florida. We've got really dominant portfolios in most of the other cities. So if we were going to stretch today, it would be in probably one of those three geographic areas. And we haven't seen the right opportunity.

Mark, I'll let you add a little additional color.

I think everything Jim said is right on. I think we still first, Manny, look at the quality of the property, and where the property is located, and is it a property we want to own -- regardless of what our capital cost is. Just because we are trading as a nicer stock price today than we were six months ago doesn't make us want to go out and overpay for property.

So I think the quality of the property and where it is is still number one. And you know, if we are trading at a nice size premium, it may help us justify stretching a little, but it's still got to be property we want.

So if we combine all of those thoughts together, what's the likelihood that you actually act on picking up a larger portfolio in the next, call it, 6 to 12 months? Are you seeing anything you like, especially now that you can pay for it? I'll ask it differently.

No, I don't think we see anything out there right now that we like well enough to do that -- you know, as far as the large portfolios. I'm not saying there won't be a one-off transaction here or there, but no large portfolios out there right now that we see.

That was it for me. Thank you.

Dave Rodgers.

Jim, I think in your commentary you talked about having a pretty big backlog of build-to-suit activity, but obviously the start to the quarter were all spec. So I don't know -- maybe a little color on kind of was it just a timing issue in terms of what you started and what you plan to start the rest of the year? And I guess maybe a second part of that question is, I guess, looking maybe into 2017 without giving specific guidance, does that give us a good confidence that that pipeline could be equal to or larger going into 2017 than it is today?

Yes, sure, Dave. It's always about timing. And try as I may, I can't always get my clients to sign leases by quarter-end. They just don't feel the same sense of urgency that Mark and I do.

But yes, we took a very close look. And we assumed several of you would ask this very same question, because if you look at where we are midpoint, it would tell you we were pretty much in line with what we'd originally projected. But we do have a very, very strong pipeline for the second half of the year. It's very consistent with the business that we've been doing.

A lot of our existing clients in the areas of e-commerce and consumer products, some directly with them, some with 3PL providers -- and we've got a good mix all across the country. So given that, we felt very comfortable raising the guidance on the development side. So I think you can look forward to bigger numbers in the third quarter.

I will tell you, looking out beyond kind of the six-month horizon, we are still very optimistic. Our clients are not showing any skittishness, any pullback. Everything that's on track to get signed, I would say, in the foreseeable future, the next three or four months, is going full speed ahead. And our clients are probably more engaged with us today about their future needs, whether it's in the forms of build-to-suits or taking speculative space, because the markets have gotten so tight.

So if you're an 800,000 foot user or a 1 million square foot user in a major market, you don't have nearly the number of options. So we've gotten engaged with much more of our clients. They've been much more forthcoming with what their needs and expectations are over the next 24 months. And that has left us fairly optimistic as well.

Great, thanks.

Michael Carroll.

Kind of off of Dave's question, Jim, you seem much more comfortable starting speculative projects today compared to six months ago. Is this a function of leasing up the existing pipeline? Or are you seeing something, this activity in the market, that makes you more encouraged?

Well, I think it's a couple of those things. You know, if we all reflect back on where we were about seven months ago going into 2016, we were all talking about markets reaching equilibrium sometime in 2017. We were anticipating that absorption was probably going to be in that closer to 180 million to 200 million square feet.

And I think all of us, our peers and you guys -- anybody that follows this sector -- has been very pleasantly surprised. We are on track to be at or above absorption for the last -- the average for the last couple of years, if you just look at where we are for the first couple of quarters. And then you pair with that how successful we've been leasing virtually all of these major spec projects that we've put. We've leased a bunch of them right before they've even come in-service. We've leased another few right as they have come in-service.

The one we have under contract to sell to a user here in Indianapolis -- that was probably in-service for about six or seven months, was probably the longest one we had on the shelf. So I think, you know, given the confidence in our operating teams, our record high occupancy, and the state of the overall demand in the marketplace, we feel more comfortable accelerating a number of those spec projects.

Yes, and I would just reiterate what Jim said earlier too, -- that this quarter being almost entirely spec was just more timing than anything. We have got some pretty good data points looking forward, with some good build-to-suits in the pipeline prospects. So I think as you see us go forward, it will be still in that above 50% to 60% preleased range in total.

Great, thank you.

(Operator Instructions) Ki Bin Kim.

Could you just comment on what you think lease spread could be going forward? You obviously put up about 18% this quarter. If you look at the mix of what's coming due and the strength in just overall industrial market rents, do you think that is a sustainable number, or could it actually get better?

I'll try that, Ki Bin. I think it's -- for the next 6 to 9 months, I think it's pretty sustainable. I think I mentioned earlier about a fourth of our leases rolling in the next 18 months were what we consider to be those trough leases, and we're going to push rents really, really hard there. They'll be in the -- some of those will be in the 25%, 30% range.

But I think overall we reported 19% this quarter; I think we were more like 14%, 15% the previous quarter. I still think you'll see us in that mid- to upper teens on average for the next 3 to 6 months.

And I would add to that: if you just -- you know, if we all stood back we look at the macro numbers, today most of the brokerage and research firms are tracking somewhere between 165 million and maybe 180 million square feet of supply that's projected to come in-service over the course of the next year. And we are on track to have another year of 240 million to 250 million-plus square feet of absorption.

So I think in the short-term, there's a higher probability that that overall vacancy goes down before it goes up again. And I think if you see that macro trend, you're going to see us continue to have the leverage to continue to push rents.

And just tied to that, typically I think your expiration profile is about 10% per year. How much do you really pull forward -- so from a practical standpoint, even though you show 10%, is it really like 12%, 15%? Just curious how that looks like.

Yes, Ki Bin, we don't like to get right up the day the lease rolls. So when a lease renews, it's typically going to be 2 to 6 months before it comes up. So you could be looking at pulling forward, call it, maybe six months of the next year's leases. So that takes you from 10% to closer to 15%.

Okay. And this is just a question based on your same-store revenue off those two things. But if you are rolling over, like, around 15%, and -- let's give it the benefit of the doubt that you can do 18% market rent growth, how do you get above 2.5%, 2.7% same-store revenue growth or 3% revenue growth on a go-forward basis, even though industrial fundamentals are really strong? What are we missing in that equation?

Okay, I'm not sure I followed that one, Ki Bin. So are you quoting a number that we reported, or are you looking --?

No, no. I'm just saying, in theory, if you are rolling over 15% of your portfolio and market rents are up, on a GAAP basis, 18%, how do we get above 3% same-store revenue growth?

Same-store NOI growth?

Well, assuming occupancies are flat, right?

Well, I don't think we're assuming occupancies are flat. We're assuming we're still going to drive occupancy. Occupancy growth will slow, but we are not assuming flat occupancy. So we believe that we will still grow occupancy in that pool of property for the next six months.

You couple that with the rent bumps, which -- we have about 2.25% rent bump. You then add the, call it, 15% that you talked about rolling; then we can push rents up close to 20%. And then the final factor is burn-off of free or reduced rent. And all that together is what gets you up to that number.

Okay. Thanks, guys.

Thanks.

Sumit Sharma.

A question on capitalized interest. So you've increased the guidance for development starts, and that should result in higher capitalized interest, at least maybe in the second half of the year. I'm just wondering what level of capitalized interest savings or what level of overall interest savings are you contemplating from this versus, say, 2015?

Really at about the same run rate that we've had first half of the year. Even though we are quoting a start number, we capitalize our interest based on the actual spend. So a lot of the starts that we are quoting, the development spend won't happen until late this year, early next year. So we're really looking at continuing at about the same run rate that we have for the first half of the year.

And then couple that, I would say also, with the fact that our overall average borrowing costs are going down. So that actually lowers the amount of interest we capitalize a little bit as well.

Thank you so much.

Eric Frankel.

Mark, can you help me out with -- do you have on hand the re-leasing stats for renewal leases if you factor in those new deals that were signed as soon as the spaces went vacant?

Yes, I would tell you that -- you know, Eric, we've always -- are you talking about the new second-generation leases that backfilled, what that would have done --?

Right, yes, yes, just because you threw in the renewal percentages (multiple speakers)

If you just isolated those deals, it would have improved it quite a bit.

Okay.

In total I would tell you that the total new second-generation leasing this quarter, because it was easy, it was like an apples-to-apples comparison of the old tenant to the new tenant -- you know, in the past we've never quoted that number, because sometimes they don't take the same space and all that. This quarter it happened to be pretty easy. I would tell you, if we would have quoted that number, it would have actually been little bit better than our renewal.

Oh, okay.

Not a lot, but a little bit.

That's helpful to know. And just another question; I'll jump in the queue if there's other people, but I'm trying to understand the same-store NOI growth calculation and how development -- contributions from development influence that, just because, as you said, there's a lot of leases that are coming -- there's a lot of properties coming to the portfolio with leases that are just signed. And I'm trying to understand just how that's -- how it's influencing the same-store NOI growth statistic and whether NOI is actually understated this quarter as a result of all of that lease-up that occurred.

Yes, and I may have misled you, then, Eric. It's not just development; it's leasing in general. An example of that would be those four big backfill deals. You know, they are in our occupancy number, because the leases are signed, but we're not collecting rent yet. But we will start to collect rent on that in the third and fourth quarter.

So it's not just development that is causing that. It's all the leasing we are doing, not just development. But maybe to specifically answer your development question, the way we do same-property is we put properties in our same-property pool after they've been in-service for 24 full months. So as you sit here today, the only development projects we have in our same-property pool would have to have been in-service on April 1 of 2014 so that you had two full years in there.

But I don't know if that answers your question or not?

Okay. I just -- so you think that the timing issue related to some of the leases you sign during the second quarter -- that just hadn't quite flown through?

I think that's right. It's more timing than anything. And then as I tried to mention in my opening remarks, in the second quarter, there were three or four individually small expensed true-up type items that hurt us this quarter. And actually, if you went back previous year's quarter, we had a couple adjustments that were revenue related that helped that quarter.

So when you look at the two together, it distorts this quarter's NOI growth a little bit. And FYI -- I think you've heard me say this a million times -- I don't like to look too much at just the quarterly number. I like the 12-month number better, because it doesn't take one little item, and multiply it by four, and skew your result.

Understood. Okay, we'll do some work. We'll jump back in the queue. Thanks.

James Feldman.

With your large build-to-suit pipeline, can you talk about what's happening to the space those tenants are leaving behind? Are these new requirements and space reconfigurations, or are they already in the portfolio? It seems like everybody is looking for new buildings, but how do we think about the fallout from that?

Well, Jamie, I think if you just look at our existing portfolio and the fact that we've been able to raise occupancy, net-net, there's a great deal of net absorption out there. If you want to talk specifically about those build-to-suits, some are absolutely new deals where the client has not given up any space, some of which are consolidations of multiple spaces, where they are looking to gain some additional efficiencies. They are generally adding additional space in there, because most of those clients are growing. But as we did this quarter, we've been able to backfill space at very good rental rates. So net-net there is probably a little bit of both.

But there's a lot of demand out there. When you've got overall nationwide vacancy of 5.2% and you've got a lot of big users out there seeking new space, it's a good time for us in the industrial business.

Okay. And then in terms of the speculative starts in the quarter, it looks like Eastern Pennsylvania and Southern California. Are there other markets -- do you think you'll spread to more markets with the speculative starts? I know it sounds like it will still be pretty measured. And then how would you say the count -- like, other developers in the market, are you seeing them start to get more comfortable with spec, also?

Well, I'll take the last question first. Yes, there's no shortage of people doing spec development. I think what we are all very happy or pleased with is that demand continues to outpace supply by a pretty healthy margin.

To your first question, when we've got, I think, 18 of our 21 markets above 90%, and 12 above 95%, and a couple at 100%, we are in a position to start spec in virtually all of our markets. We'll probably be a little bit more measured than that, particularly some of the markets like New Jersey, Pennsylvania, Southern California -- the high barrier markets, where it takes a little longer to entitle land and improve projects. You probably can't reload quite as fast as you'd like. And that's a burden we bear for being a little bit more cautious than perhaps some of the local developers, but it's worked for us very well so far.

So you'll continue to see us take a measured approach, do some speculative development in a number of these different markets. We mix that in with our build-to-suit, and I think the pipeline will look very, very good in the second half of the year.

All right, great. Thank you.

Blaine Heck.

Just a quick clarification related to the vacant Indianapolis asset you guys have under contract. So was that move to held-for-sale during this quarter, and thus had a positive effect on occupancy during 2Q? Or is that going to be a positive for occupancy in the third quarter?

Blaine, it was moved in the second quarter. So it has moved out of our population, if you will, down in the held-for-sale. So that did help occupancy in the second quarter. And when you sell it in the third quarter, it will have no impact on occupancy, since it has already been taken out.

Got it, thanks.

Yes.

Eric Frankel.

One more question. How tough it is to buy land today?

Eric, it's not tough; it's expensive. Most of our markets that we are active in, land prices have exceeded previous peaks of 2007/2008. I think that's another reason why our strategy to be very, very prudent on our land inventory is paying off for us.

So I was asked -- oh, it was probably at NAREIT -- if, given where we were, were we going to go out and bulk up on land. And we have continually advised our business guys: now is not the time to bulk up on land. We'll buy what we need, put it in-service as quickly and efficiently as possible, and keep that land inventory at a very efficient level. And we'll look to make some key buys somewhere down the road, when land prices return to a somewhat more normalized level.

Okay. Actually, I misspoke. I have one more question. Can you just clarify the valuation of the JV breakup with Gramercy? I think on the back page of the supp, you value a building at $67 million. But I think you, in your opening commentary, made it sound like it was actually closer to -- $53 million was the portion of which that you paid. So I'm just trying to understand the valuation better.

No, there were two buildings, Eric. We bought two buildings this quarter. I think we quoted $51 million for the value of the industrial building that we effectively bought, using air quotes here, from Gramercy; and then about $16 million for a medical office building that we had actually had under contract for well over a year. So there were two buildings in that $67 million in the supplemental.

Oh, and that $51 million -- for the 80% interest?

Correct.

Okay. That's all I need to know. Okay, thank you.

All right, thanks.

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I'd like to thank everyone for joining the call today, and we look forward to reconvening during our third-quarter call, set for October 27. Thanks again.

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