Prologis Inc (PLD) — Q2 2016 Earnings Call Transcript

Thank you, Ronda. Good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Jim Connor, President & 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. Naturally, the industrial markets’ momentum continues to be very strong. Demand outpaced supply for the 25th straight quarter, new supply in substantially all markets is balanced, 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're seeing similar strength in our own portfolio with the completion of 6.9 million square feet of leasing for the quarter, which 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 leasing second-generation space with new tenants within our portfolio. One notable new lease was signed with Amazon for 1.1 million square feet in 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 will 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’re seeing most of these customers continuing 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’re 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 pre-lease percentage and 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 was 72% pre-leased. 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 in 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.

Thank you, 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 for income recognized related to the dissolution of the Gramercy joint venture that I will expand on in a minute. The promote income is excluded 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 three months ended June 30, 2016 was 4.5% and 3.5% respectively. Let me point out that the second quarter’s three-month figure is negatively impacted by a few individually small non-recurring 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 mid-point. 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 2015. We executed some significant debt transactions during the quarter as well. We used the proceeds that have been received from the seller financing I just mentioned and property sales to pay off secured loans totaling $330 million to 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 lower our overall borrowing costs. In the equity capital markets, we issued 4.6 million shares under our ATM program through July 08, 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 due to the fact that our shares have not traded at full interest 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 plan to re-up the program to be prepared for future strategic and freedom opportunities. We concluded the quarter with $141 million of cash and lower 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 of these capital transactions, coupled with our operational performance, resulted in a significant improvement to our key financial metrics and we expect to see further improvements 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 mid-point. 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 mid-point. 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 mid-point. Finally, given our capital recycling activities and our recent debt paydowns as Mark touched on, we’ve changed the guidance for all three of our leveraged metrics in a positive direction. Details are provided in the supplemental package in 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 our website. In closing, we’re very pleased with our team’s execution through mid-year and our leasing performance, capital redeployment, and balance sheet management. We are very optimistic about a strong performance for the remainder of the year. We’ll now open up the lines for the audience, and we ask participants to keep the dialogue to one question or perhaps two very short questions, and you, of course, are welcomed to get back in the queue. Thank you.

Great, thanks. 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 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. Well, 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 investments and where our stock was trading at, it was a good way to pre-fund that. So, we're really taking care of both from a balance sheet perspective and everything we have baked into our guidance through the rest of the year. I mean certainly we like our stock price better where it is today than 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, and 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 our occupancy is better than what we had expected and that is reflective in the increase in our guidance. Some of that occupancy hasn't made its way into the rent yet and most of our actions stay on a lease sign basis. So as those leases come online, we do expect rental increases; some of the leasing we did early in the year or even late last year may have had just some minimal free ground or reduced rent in there that's burning off so we have rental rate increases. You've got occupancy increases and then rental rate growth is better than what we expected at the beginning here as well. We reported almost a 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 in 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 is driving that.

Okay, sounds great, thanks guys.

Hi, good afternoon everyone. I would like to hear your updated views on the suburban asset sales planned for the rest of the year. First, is the pricing and interest you are seeing in the market consistent with your initial expectations when you provided the full-year guidance? Second, regarding the guidance for the remainder of the year, are the implied proceeds solely from suburban operations, or should we anticipate that some industrial sales will also be included in that total?

I believe everything is on track. A few general observations: while buyer interest is still sufficient to complete deals, it is somewhat weaker than in the past. Nevertheless, we are making progress and remain aligned with our plans for the remaining office sales this year, so we do not see a need to alter our guidance. It's not solely office; we have sold some properties in Phoenix and a couple in California this year. For our year-end projections, we anticipate that about 70% to 75% of our sales will be office, with around 25% to 30% being industrial, along with a few one-off sales. Overall, I would estimate that 70% to 75% of our total will be office.

And just related to that, according to my calculations, it's almost $500 million of guidance at the midpoint for the back two quarters of the year from dispositions. So is it correct to assume that $350 million to $400 million would come from suburban office proceeds? And would that represent the majority of your suburban office portfolio?

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

He is shaking, yes, okay good.

Up and down.

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

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

Well, thank you John, I will take that as a compliment. As we have talked about this at the last meeting, we have really changed the culture of Duke Realty. Many of you who have followed us over the years, we used to love to buy 500-acre farms and turn them into business parks, and 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 prefer to take it down and bite those pieces and put it into production as quickly as possible. So as tough as it has 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 has 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 could stay here for the foreseeable future.

All right, okay, now. Yes, one more question. Looking at page 28, it seems you have a significant build-to-suit project in Southern California along with a couple of 600,000 square foot speculative products. This represents nearly half of your stabilized costs for bulk distribution, yet your yields for these are approximately 6.3% on a cash basis. Could you elaborate on the locations of these projects in Southern California and the yield on costs you anticipate in that region?

Yes, most of our development in Southern California right now is in the Inland Empire. The large build-to-suit you mentioned is located there, along with several other buildings. We are also undertaking a redevelopment project in Orange County. Although the cash yields are lower than what you have historically seen from Duke Realty's portfolio in our more mature or Midwest markets, they still represent a significant return compared to the exit cap. Pricing in Southern California has reached near-record levels, with every deal currently trading in the low 4% range, and some properties even in the high 3% range. Even at 6.3%, we are generating substantial value for our shareholders. However, we are not looking to sell; our goal is to hold and expand our portfolio in that region.

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 has a 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.

Maybe if we consider how to combine your interest in equity or the at-the-market strategy with the portfolios available in the market, particularly when your stock is priced above its net asset value. Do you view those portfolios differently now compared to before the recent increase in your stock price? How do you find a balance between the at-the-market sales and the larger equity offering?

Well, 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. It is 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 to stretch today, we would be in probably one of those three geographic areas. We will tune in to the right opportunity. So Mark, I will let you add a little additional color.

Yes, I think as Jim said right on, I think you 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 at a nicer stock price today than we were six months ago doesn’t make us want to go out and overpay for properties. So I think the quality of the property and where it is still number one, and if we are trading at a nice size premium, it may help us justify stretching a little bit, it still got to be a property that 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, six 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. And as far as large portfolios, I am not saying that 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.

Jim, in your comments, you mentioned a significant backlog of build-to-suit activity, but the beginning of the quarter was primarily focused on speculative projects. Can you provide some insight into whether this situation was simply a timing issue regarding what you've initiated and what you anticipate starting for the rest of the year? Additionally, looking ahead to 2017, without delving into specific guidance, does this suggest that the pipeline could potentially be as robust or even larger in 2017 compared to 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, and we’d tell you, we were pretty much in line with what we had originally projected. But we do have a 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 ecommerce and consumer products, some directly with them and 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 well forward to bigger numbers in the third quarter. I will tell you looking out beyond kind of the six-month horizon. We’re 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 form of builds suits or taking speculative space because the markets have gotten so tight. So you are an 800,000-foot user or a 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.

Thanks. 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, market activity that makes you more encouraged?

Well, I think it’s a couple of those things. 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 the sector has been very pleasantly surprised. We’re on track to be at or above absorption, 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 impair with that how successful we’ve been leasing virtually all of these major spec projects that we have 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 that we have under contract to sell through a user here in Indianapolis that was probably in-service for about six or seven months. It was probably the longest one we had on the shelf. So I think given the confidence in our operating teams, our record high occupancy, and the state of overall demand in the marketplace, we feel more comfortable accelerating several of those spec projects.

Yes, and I would just reiterate what Jim said earlier too that this quarter being almost entirely spec, it was just more timing than anything. We’ve got some pretty good datapoints looking forward of build-to-suits in the pipeline prospect. So I think just going forward it will be still in that above 50% to 60% pre-lease range in total.

Great, thank you.

Thanks. Could you just comment on what you think lease spreads could be going forward? You obviously put 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?

Yes, I will try that Ki Bin. I think for the next six to nine months, I think it’s pretty sustainable. I think I mentioned earlier about a fourth of our leases rolling in the next 18 months for what we still consider to be those trough leases, and we're going to push rents really, really hard there and they will be in several of those would be in the 25%-30% range. But I think overall, we reported a 19% this quarter; I think we were more or less 14-15% the previous quarter. I still think you will see us in that mid to upper teens on average for the next three to six months.

Yes, and Ki Bin, I would add to that. If we all step back and look at the macro numbers today, most of the brokerage and research firms are projecting somewhere around 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're on track to have another year of 240 million to 250 million plus square feet of absorption. I think in the short-term, there is 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 rent.

And just related to that, I believe your expiration profile is around 10% annually. How much do you actually pull forward? From a practical perspective, even though you indicate 10%, is it more like 12% or 15%? I'm interested in understanding how that appears.

Yes, Ki Bin, we don't like to wait until the day the lease rolls. So when that lease renews, it's typically going to be two to six 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 am not sure I followed that one, Ki Bin. So, are you quoting a number that we reported; are you looking to…

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 occupancy to be flat. We're assuming we're still going to drive occupancy. Occupancy growth will slow, but we're not assuming flat occupancy. So we believe that we will still grow occupancy in that pool for properties 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, that 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.

Hi. 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 about the same run rate that we’ve had in the first half of the year; even though we’re quoting a start number, we capitalize our interest based on the actual spend, so a lot of the starts that we’re quoting, the development spend won’t happen until late this year or early next year. So we’re really looking at continuing at about the run rate that we have for the first half of the year. And then to 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. Mark, can you help me out with the re-leasing starts for renewal leases if you factor in those new deals that were signed as soon as the spaces went vacant?

Yes, I can tell you that we have always been discussing the new second generation leases that have filled the gaps.

Right, yes, yes, just because you mentioned the renewal percentages.

If you just isolated those deals, it would have improved it quite a bit. 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 tenants out with the new tenants. In the past, we have never quoted that number because sometimes it all takes 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 a little bit better than our renewal.

Okay.

Not a lot but a little bit.

That's good to know. I have another question and will join the queue if others have inquiries. I'm trying to grasp how the same-store NOI growth calculation works and how contributions from development affect it. There are many properties in the portfolio with recently signed leases, and I'm curious about how this is impacting the same-store NOI growth figure. Is it possible that the NOI for this quarter is understated due to the lease-up that has taken place?

Yes, I may have misled you there, Eric; it's not just development, it's leasing in general, and an example of that will be those four significant backfill deals. They are included in our occupancy numbers as the leases are signed, but we aren't collecting rent yet; we will start to collect rent in the third and fourth quarters. So it's not just development that's impacting this, it's everything we mentioned, not just development. However, to address your specific question about development, we classify properties in our same-property pool after they have been in-service for 24 full months. Therefore, as of today, the only development projects we have in our same-property pool would need to have been in service by April 1, 2014, to have met that two-year criterion. I'm not sure if that answers your question or not.

Okay. So you believe that the timing issue related to some of the leases signed during the second quarter hasn't fully materialized yet?

I think that is 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 expense true-up type items that hurt us this quarter. And actually, if you went back to the previous year’s quarter, we had a couple of 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.

Thank you. 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, Jimmy, I think if you just look at our existing portfolio and the fact that we have been able to raise occupancy, net-net there is a great deal of net absorption out there. If you want us 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; there is generally additional space in there because most of these clients are growing. But as we did this quarter, we have been able to backfill space at very good rental rates. So in that, there is probably a little bit of both, but there is a lot of demand out there when you have got overall nationwide vacancy at 5.2% and you have got a lot of big users out there seeking new space. It's a good time for us in the industrial business.

Okay. Regarding the speculative starts this quarter, it appears to be Eastern Pennsylvania and Southern California. Are there any other markets where you anticipate expanding with speculative starts? It seems like it will remain quite cautious. Also, how do you perceive the activity of other developers in the market? Are they becoming more at ease with speculative development?

Well, I’ll take the last question first. Yes, there is 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, we have 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 specing virtually all of our markets. We will probably be a little bit more measured than that. Particularly some of the markets like New Jersey, Pennsylvania, and Southern California are 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 would 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 several of these different markets. We’ll 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.

Thanks. 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?

No, Blaine, it was moved in the second quarter. So it’s 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 we sell it in the third quarter, it will have no impact on occupancy since it has already been taken out.

Got it, thanks.

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

Eric, it’s not tough; it’s expensive. And most of our markets that we’re 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, I think it was probably at NAREIT, if given where we were, we were 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 that. We will 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 will 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, I am air quoting 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 2 buildings in that $67 million in the supplementals.

And that $51 million for the 80% interest?

Correct.

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

All right, thanks.

I’d like to thank everyone for joining the call today. We look forward to reconvening during our third quarter call on October 27th. Thanks again.