Prologis Inc (PLD) — Q2 2018 Earnings Call Transcript

Thanks, Greg. Good afternoon everyone, and welcome to our second quarter earnings call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien, Chief Financial Officer; and Nick Anthony, Chief Investment 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, 2017, 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 with a short update on the business environment we're seeing today and then cover our second quarter results. Demand for logistics space has never been stronger. An expanding economy and the rapid pace of supply chain reconfiguration and expansion continues to provide tailwinds for logistics real estate. Across the U.S., industrial market fundamentals maintain the momentum we saw in the first quarter. Demand outpaced supply by 10 million square feet for the quarter. Year-to-date, net absorption was about 105 million square feet, slightly above the rate for 2017, but similar to what we've seen for the last few years. Completions year-to-date were about 90 million square feet, also relatively similar to the last few years. U.S. industrial market vacancy now stands at 4.4%, which is down 20 basis points from a year ago. Nationally, rents grew 6% for the quarter compared to the second quarter a year ago, and we would expect that rent growth to remain constant through the remainder of the year. We're seeing new construction across the country maintaining a somewhat level pace. Total supply under construction is about 230 million square feet. Yet we expect demand to continue to outpace supply which bodes well for continued tight fundamentals and rent growth for the foreseeable future. Let me touch on the topic of trade tariffs, which are currently in the headlines. We are not currently seeing or hearing of any impact from our customers today. I would also point to business inventories and industrial production, both of which grew in the second quarter. Consumer spending rates, a data point that's highly correlated to the demand for our type of product, are at the highest level since the 2008 recession. This news combined with strong consumer sentiment leads us to believe the tariffs will not materially impact our business for the foreseeable future. Even if the situation escalates and impacts consumption or consumer confidence, we believe the supply chain trends occurring today with the demand for larger, more cost-effective facilities and last mile infill development will continue to drive demand in our sector. Switching to the construction side, we have seen increases in steel pricing and labor costs, which have pushed our total hard costs up by about 5% to 6%. However, market rents continue to rise. These increases have not really impacted our yields. Turning to our own operating results, we’re seeing similar strength in our portfolio with stabilized in-service occupancy at 98.2%, which is down slightly from the last quarter but still very strong. Total in-service occupancy is up 40 basis points to 97.4%, due largely to the leasing progress in our spec projects. During the quarter, we executed 7.8 million square feet of leases across 16 markets, which is very strong in light of the high occupancy and relatively low lease expirations in our portfolio. The lease activity included space from recent acquisitions as well as spec developments and exceeded our underwriting on both lease-up timing and rental rates. A few notable leasing transactions for the quarter included a 1 million square foot, 20-year lease in the Lehigh Valley, which is our newest speculative facility, delivered the same month. This lease was with a major parcel carrier, logistics firm and brings the occupancy of our 2.7 million square foot, 33 Logistics Park to 100%. Secondly, there were three leases executed in the Bridge portfolio, which brought that entire 3.4 million square foot portfolio to a 100% lease, compared to 58% leased when we agreed to terms just over a year ago. The leasing in this portfolio exceeded our original expectations both in terms of timing and rental rates. In general, the performance of these acquired Bridge assets, as well as other investments funded from the 2017 MOB sale, has contributed to our decision to raise full year 2018 occupancy and earnings expectations, which Mark will discuss in a moment. Overall, the leasing activity with strong fundamentals led to another outstanding quarter of rent growth of 9% and 22% on a cash and GAAP basis, respectively. Turning to the development for the quarter, we started $393 million of projects across 9 markets. These projects were 53% preleased in aggregate and are projected to earn an average initial cash yield of 6.5%. Our development outlook for the remainder of the year looks very solid. We have a healthy pipeline of prospects across our entire platform. This combined with the outstanding year-to-date results is driving our increase in guidance for development work, which Mark will also cover in a moment. Now, I’ll turn it over to Nick to cover acquisitions and disposition activity for the quarter.

Thanks Jim. We closed $301 million of dispositions in the second quarter, with all of those proceeds from the Columbus portfolio, which we mentioned in previous calls, and a deal that was in the news from the buyer's press release back in May. As you recall, this was a 3.8 million square foot portfolio located about 50 miles west of Columbus, Ohio, that Bon-Ton stores, a company in liquidation, contributed 20% NOI. In context of this risk and some other lease expirations in the coming years, we believe we achieved a very strong price in the sale of $61 per square foot. We've recycled a portion of these dispositions proceeds into acquisitions which totals $187 million for the quarter. The largest one was a 1.1 million square foot, 3 buildings state-of-the-art logistic portfolio in Miami, Florida. These assets are located in the Medley Submarket near the Miami airport. Moreover, we expect this recycling from the Columbus assets and infill Miami to be accretive on a long-term IRR basis by approximately 90 basis points, given the near-term vacancy and rollover in the Columbus portfolios compared to those tech players and expected better market rent growth in Miami. We were pleased with the execution of our redeployment. I will now turn our call over to Mark to discuss our financial results and revised guidance.

Thanks Nick. Core FFO for the quarter was $0.33 per share compared to $0.30 per share in the first quarter of 2018 and $0.32 per share in the second quarter of 2017. Core FFO increased from the first quarter of 2018 due to the typical first quarter spike in non-cash G&A expenses related to our annual stock-based compensation grant in February, along with continued overall strong operating results. We reported FFO as defined by NAREIT of $0.33 per share for the quarter compared to $0.31 per share for the first quarter of '18 and $0.36 per share in the second quarter of 2017. NAREIT FFO in the second quarter of 2017 was positively impacted by $20 million of promote income we've recognized in connection with the medical office sale. Same property NOI growth for the quarter was 3.9% on a cash basis, up from 3.4% in the first quarter and growth is 3.7% year-to-date as a result of continued rental rate growth on releasing and free rent periods burning off on leases that commenced over the last few quarters. Year-to-date, same property NOI on a GAAP basis is about 130 basis points higher than our cash basis due to free rent and some prior straight line rent bad debt expense. Looking out for the remainder of the year, we expect same property growth to continue to accelerate in Q3. We finished the quarter with $232 million in available cash to redeploy into new investments. We also have $277 million in interest bearing notes, of which $145 million will mature over the next 12 months with no outstanding borrowings under our unsecured line of credit. As discussed last quarter, our capital needs for the remainder of the year includes the prepayment of two secured loans in September totaling $227 million, which were interest at an average rate of over 7.6%. Let me now address our revisions to our 2018 expected range of estimates, which is an exhibit at the back of our quarterly supplement as well as on our website. To reflect the continued leasing momentum and overall strong rental rate growth, which continues at a pace that significantly exceeds our original expectations, we have further increased guidance for core FFO to a range of $1.29 to $1.35 per share, which equates to $0.03 per share at the midpoint. As mentioned in April, the majority of this growth will be generated from newer developments. A perfect example of this is our second quarter development deliveries. We delivered 2.9 million square feet representing an investment of $198 million, that were 57% preleased when we started the projects, but were delivered at 100% leased. The margin on these deliveries was almost 50%, well ahead of our original expectations. We continue to have tremendous earnings upside from our platform that will not be included in our same property results, but it's nonetheless a great outcome. We will balance it with continued solid growth in our same property population, which is impressive given the risk return nature of this population at 98% occupied with very little rollover in the next couple of years. This increase in core FFO guidance is indicative of an 8% to 11% increase for the second half of 2018 compared to the first half of 2018 and an 11% to 15% increase over the second half of 2017. We’ve been saying that we believe we are positioned for strong growth by the second half of this year, and this guidance update reflects that. We also increased our ranges for average percentage lease for both our stabilized and in-service portfolios with midpoints increasing by 30 and 40 basis points respectively. We increased our estimate for development starts by $100 million to a range of $758 million to $950 million for the year and reduced the high-end of our acquisition guidance by $100 million. In addition, we increased our range on dispositions by $85 million at the midpoint to a range of $472 million to $600 million. Reverse revisions to certain other guidance factors can also be found in the Investor Relations section of our website. Now I’ll turn the call back over to Jim.

Thanks Mark. In closing, we’re pleased with our team’s execution through mid-year across our operations, capital redeployment, and development. Logistics real estate fundamentals are firing on all cylinders. It appears the economy is on solid footing and our strategy and platform is very well positioned to capture growth opportunities for our shareholders. We will now open up the lines to the audience. We ask participants to keep the dialogue to one question or perhaps two short questions. You are, of course, welcome to get back in the queue. Operator, you may open up the lines.

Jim, I appreciate the comments on sort of the tenant health or trade environment. I was just wondering at the top, how you measure the health of your tenancy, especially in the growth plan? And how it relates to specific properties in your portfolio?

Well, I think there are two components there, Manny. The health or what we would refer to as the financial health, we’ve got fairly strict credit rating and underwriting guidelines that we’ve always maintained. So, those are in place and those haven’t changed. In terms of our client outlook and in particular their reaction to all of the headlines about tariffs, we have meetings and conversations with our major tenants on an ongoing basis. We sat personally with three of the larger ones just this week and had those same conversations in terms of what they’re feeling, what they’re seeing, if they’re changing any of their expectations for their use of space and their need for space for the balance of this year or next year. And we have yet to see one of our major clients tell us they’re putting things on hold or pulling back. So, we’re still pretty optimistic that the overall positive direction of the economy is going to continue to hold from a logistics sector.

And then in terms of your development pipeline, as your pipeline grows and your pre-leasing stats have come down a little bit and getting closer to, I guess, the lower end of your comfort zone? Does that comfort zone shift at all given how well the economy is doing and given some of your opportunities for development?

Manny, I think it’s really the change if you see the last couple of quarters is just timing. Given the nationwide nature of our development activities, we do the majority of our development in the summer months. So typically the second quarter result is probably our strongest development quarter. So we had anticipated that that preleased percentage would come down towards the lower end of the range. And it may yet come down again toward the bottom of that range in the third quarter. But again that should be expected and as long as we keep leasing and doing build-to-suit, we expect to stay above 50% and continue to push our development volumes across the country.

Jim, clearly you guys had a big win with the UBS lease this quarter. So I wanted your thoughts on the Lehigh Valley market in general. There has been some off-and-on talk of oversupply there. But I'd be curious to hear, how you think it's positioned at this point?

That would not make the top of our caution list. There is a fair bit of space out there, but there has always been demand, and it tends to come and go in pretty big increments. The ones that we have historically always talked about have been, in no particular order, probably Atlanta, Dallas, and then the Inland Empire East, which is where there is a lot of spec space out there, but there continues to be good demand. So in short order, I would tell you we're not concerned about the Lehigh Valley. We've got another 130,000 foot building that's under construction becoming in service here in the next couple of weeks, and we've got really strong activity on that as well.

That's helpful. And then I noticed the cap rate you guys are using in the value creation calculation on the development pipeline increased from last quarter. All of the commentary we've heard points to decreasing cap rates. So I'm assuming it's a mixed issue, but wanted to get some commentary on what exactly drove that change?

You're exactly right, Blaine. As far as the population driving this cap rate, it's entirely mixed. I'll let Nick comment on the overall cap rate environment because I think it's the opposite.

Yes, that's correct. We continue to see some cap rate compression. CBRE just came out with their cap rate survey and I think they noted that Tier 1 markets cap rates compressed by about 10 basis points and the Tier 2 markets decreased by about 15 basis points.

Great.

So, on the asset sales in particular Columbus and Bon-Ton component to that and then the redeployment, can you talk about the cap rate spread that impacted perhaps your numbers and maybe some dilution from that trade in particular that perhaps could allow you to grow your FFO guidance even further had it not been for that trade?

Well, the in-place cap rate for the Columbus portfolio was fixed. But once Bon-Ton vacated, it was in the high 4s. And that compares to the acquisitions which were mid 4s. So, it's actually sort of a wash when you factor into the fact that Bon-Ton vacated. And then as we noted on our long-term basis, the yields are much higher on the Miami transaction.

So, it is a little dilutive from what it was in the first half of the year, but it wasn't only dilutive for the last half of the year once that Bon-Ton lease rolled.

Right but in terms of what your run-rate was because you did have fixed working for you at this point in time?

Yes, it is dilutive, you're right, for the second half of the year. I guess my point is, it would have been dilutive what we did to the Miami transaction not because of the vacancy coming out of some Bon-Ton.

And then, I want to talk about property taxes and as I just chatted with Ron a little bit pre-earnings about the fact that you’re largely triple net like a lot of your peers. And I’m curious to what degree do you worry about property taxes given that a lot of that would be passed through and how you’re managing that issue in particular?

Well, I would make a couple of comments. Property taxes are our second biggest expense in operating the portfolio and even though we’re 98% leased and most of these buildings are our true triple net leased. The fact the overall gross rent that we can achieve in the marketplace, so we’re always very sensitive to tax increases, we also worry about markets where they have tax abatement and tax abatement burns off. So, it’s a big part of our asset management strategy, and we pay a lot of attention to it.

And we do, Rich, have an in-house real estate tax consulting team that works with our tenants. They try to bring that down as best we can. So we do, we can't.

And what’s the growth rate in property taxes, if I could just tag on assumed in your guidance?

Well, effectively at zero because, like you said, it is all pass-through. So at this occupancy level, it really doesn’t affect our bottom line in the short-term. It’s just the flexibility to grow overall rents over the long-term.

I was hoping to get more insight into the markets and where you see potential for growth in the development pipeline, especially considering the raised guidance. Which markets are you focusing on, and what has given you the confidence to increase that number?

Well, I would give you a couple of answers, Jamie. First of all, from a spec development perspective, the state of our portfolio in terms of occupancy and near-term rollover, we could build speculative space in literally every one of our markets that we’re not going to, but we’ve got operating business guys that are eager to build more spec. So, it’s a blend of how much leasing we get done in the existing spec development and the existing portfolio and how much build-to-suit. Right now, we’ve got a very healthy build-to-suit pipeline that refers back to the original conversation about tariffs. We spent a lot of time talking to our clients about their needs coming up over the next 18 months and everything remains very positive. The ultimate amount of development we do is really a function of how much spec leasing we do and how many build-to-suit we do. Because we can always do more spec development, but we’re just trying to manage our risk.

Jamie, perfect indication is just where we built in the second quarter because if you look at our year-to-date starts, we're already at what was the previous low-end of our guidance. So, we really didn’t raise guidance that much with respect to future development for the year. We’re already at the low-end of the guidance. So with the strong second quarter we had, that’s a good indication of where the market is too strong.

And then as we’ve seen, the trade stocks have been more vocal. And you guys were always a little differentiated, having more of a Southeast focus, Midwest focus, less around the major port markets. The Bridge portfolio obviously grew you into some of those markets. Do you think going forward you'll try to get back to your kind of formal market concentration? Or do you still feel very good about the recent plan to grow in some of these more global trade markets?

No, Jamie, you're going to see us remain consistent to what we've talked about in terms of our strategic plan. We need to grow in more of the Tier 1 and high barrier markets. So, you'll continue to see us focused on that. But I don't think those markets bear any more risk than any other logistics markets around the country because you're talking about logistics and supply chain. So, warehouses are full all over the U.S. right now and as long as we continue with the economy on reasonably stable footing and growing we should be in pretty good shape.

Jim, you might have just touched on this a little bit. But going back to the trade topic, you've talked about not seeing any business plan changes from your tenants. But as you think about the development and the lead time to build and to lease and taking on some of this spec, obviously, you don't want to be caught holding a bunch of vacancies if your tenants do change their plans unless they do change them suddenly. So, as we look at next year, could we see proactively maybe hit the pause button a bit and see how this plays out or at least maybe pause some of the developments in those markets that are potentially impacted by trade disputes?

Well I think, Jeremy, the governors that we put in place would come into there. So if demand started to diminish in the second half of this year or the beginning of next year, or build-to-suit started to diminish or both, you would automatically see us pull back dramatically on spec development because again, we're not going to go below that 50% pipeline. And as we're looking at the lease up times on all of our speculative projects across the system and monitoring what that's doing, that factors into all of those spec decisions. So I think as long as we stay committed to the operational goals that we've stated to you guys and our shareholders, that will happen. So, if you see spec space start to slow down, if you see build-to-suit start to fall off, you'll see our development numbers come down appropriately.

And then second for me, you mentioned demand; we obviously continue to hear plenty of last mile demand and the significant upward pressure on rents for those assets. I was wondering if maybe you could bifurcate your market between coastal infill and port markets and then central? And what differences you're seeing today in terms of your ability to push rents, demand, timing to lease space, etcetera?

Yes, I think my answer would be pretty consistent with what we've seen for the last few quarters, which is the high barrier markets continue to perform at the top end of the rent growth range which is upwards of 10%. And the second tier markets are probably in the mid-single digits, 4% to 6%. So we saw last quarter you're overall at 6%. So that probably averages out. I think you're seeing that very consistently. There is such demand for that infill space in these urban areas and these high barrier markets that we're continuing to be able to push rent pretty dramatically. And I think the biggest fundamental thing that we've learned and we've talked about in some of our previous calls is that the last mile is not necessarily small as everybody thinks it is. Amazon, UPS, and FedEx are not doing 20,000 square feet releases. They’re out doing 200,000 square feet releases and 400,000 square feet leases. And that’s really what drives the last mile. It’s the package delivery guys and the e-commerce guys. It’s not local guys doing 20,000 square foot leases. And we’ve talked about some of those deals that we’ve done infill deals for UPS of 400,000 feet and on the surface, people wouldn’t necessarily think of that as last mile, but that’s exactly what it is.

Just given the success of your sales of the Columbus portfolio, what are your thoughts on more actively recycling some of the assets that you want to or in markets where you want to reduce your exposure?

Well, let me start and then I’ll let Nick give you a little bit of commentary. I think what we’re seeing in the market with our increased guidance on disposition and development and our reduced guidance on acquisitions is pretty indicative of our outlook. I think you are going to see us accelerate in dispositions because we’ve got ample opportunities on the development side to put that money to work, and I give Nick the opportunity to give you a little bit more.

Yes. And I think the reality is that we’re always looking at improving our high-quality portfolio through strategic dispositions. But the reality is the acquisition opportunities out there at reasonable prices are still pretty slim. So, we have to be very cautious about doing that. We don’t want to accelerate dispositions and not be able to redeploy the proceeds.

And just a quick follow-up question. I just noticed with the start, I think this is referenced earlier. I know the new starts that you're developing margins are a little bit thinner and even look like some of the build-to-suits are coming at a pretty high cost per square foot. So, can you just comment on the build-to-suit business and whether you’re amortizing a lot of improvements since your cost basis? Are you properly compensated for that?

No, that’s not a problem, Eric. Yes, we’ve continued to see costs increase across the country. We talked about in previous calls and meetings the cost of land, the cost of entitling land, as well as construction costs. So yes, we’ve continued to see prices go up. One of the reasons you probably have seen some erosion on those margins or yield is we’re not compromising our underwriting by amortizing a bunch of e-commerce material handling equipment or everything else into our buildings. We’ve been very consistent in terms of what goes into the base of our buildings. So, we’re very comfortable with the cost of those buildings because what these clients put in, they have to take out at the end of the lease, whether it’s mezzanines, material handling, robotics, all that stuff comes out and we’ve got a good quality box. The other thing that’s driving some of these costs increases, particularly on the larger buildings, is the amount of parking, trailer storage, truck docks, and clear heights that are going into these buildings. So today, a million square foot building is 40-foot clear. A few years ago that would have been 32 or 36-foot clear. It’s not uncommon to have 500 trailer spots that’s two or three extra acres of land going in. So that’s some of what you’re seeing contributing to these in addition to land cost and construction costs.

Jim or Nick, can you provide some color on the recent acquisition in Miami? I mean these deals are completed at low yield. Is that because you saw additional benefits from increasing scale in that market?

Yes, that's a higher barrier market we're very focused on. The in-place escalator on the existing leases are 2.5% to 3%. And we think long term rents are going to grow there at much higher pace, obviously compared to Columbus, Ohio.

Okay. And then since you've lowered your acquisition guidance, should we assume Duke is less focused on the acquisition market going forward? Are you not seeing as many attractive deals available?

We are very focused. We probably underwrote close to $2 billion worth of deals this year, but I think we're not seeing as many opportunities. And we're seeing a lot more opportunities on the development side to offset that.

And my question is on development. So you guys have about $1 billion development pipeline of which, 55% is fleet which is pretty amazing. But if you look at profit margin at the midpoint, it's about 17%, you're earning about 40 basis points of spread. Some of your peers, because they're growing more spec, we’ve seen might be much higher rate to fit the 300 basis points spread. So my question is, when you start thinking about development philosophically about your pipeline, how do you think about allocating capital to build-to-suit at which seems to be a very low spread compared to spec? And one of the factors I was thinking about is the fact that maybe having a deep personnel bench development team does that make you ultimately run faster on the treadmill because you had to put people to work? Is that part of that decision-making process?

Let me take the last question first. We're not interested in keeping people busy. Our people are plenty busy. And in terms of the spreads of the yields on the build-to-suit, everyone that we do we've approved, we don’t approve a lot of those deals, because it’s a competitive marketplace out there. And we may have underwritten something a little bit more conservatively than some of our peers. So in spite of our pretty strong track record, we don't win them all or we don't choose to necessarily pursue them all. But as we've talked in the past, there is competitive pressures out there and there are some deals getting done at some various margins. In terms of the amount of spec, Ki Bin, we thought long and hard about that over the years and we debated internally from time to time. And we remain consistent to what we said when we started this cycle, which was this cycle isn't going to last forever. And we're going to keep that development pipeline above 50%. You're right, we could probably tell you that we were going to get better theoretical margins, but high risk high reward. Not all spec projects deliver what they're underwritten to. And at this point in the cycle, I don't think it's prudent to be turning up on the aggressive scale and doing more and more spec development. Particularly when we've got ample build-to-suite opportunities and we've got great speculative leasing volume going on to be able to keep it there.

And just one accounting question maybe for Mark. With a new lease accounting change, I think you guys had already put a lot of thought into it. Last week, you capitalized about $19 million for internal leasing costs. I know this accounting change is not just a pure good thing, there could be some unintended detriment to companies like you who have skill, but maybe you can provide some comments on how much you think it will impact your reported FFO next year and maybe any other comments behind it?

Sure, Ki Bin. You’re correct that it’s a bit complicated and this situation arose from the accounting guidelines, which weren't specifically targeting us but rather applied more broadly. Regardless, we are managing the situation. Our leasing team operates entirely in-house, and while we do engage several brokers for tenants, our own representation is handled internally. We compensate our team through a mix of salary, bonuses, and commissions. With the new accounting rules, only the commissions will be capitalized, whereas currently a portion of salaries and bonuses can be capitalized too. This also affects our dedicated legal team, as we currently capitalize their costs under the existing accounting but will not under the new rules. Some of our competitors, both within our sector and beyond, outsource many of these services, paying external law firms and brokers. We have analyzed the costs they incur compared to our internal payroll, and we have determined that our approach is at least equally efficient, if not cheaper. We believe our business model is the right fit, and the accounting changes are secondary to that. That said, the transition may result in a $0.04 to $0.05 variance in recorded FFO between the old and new accounting methods. Our strategy is to adjust our core FFO so that we can provide consistent year-over-year reporting and align it with our peers who are capitalizing similar costs. We intend to make these adjustments, and we are committed to our current business model, which we believe adds value.

Jim, question for you. I want to circle back to the question on oversupply and look at it from a slightly different angle. Are there any markets where labor availability could limit tenant demand? And how could that impact your capital allocation decisions?

Yes. Tom, that’s a great question. For the first time since I’ve been in this crazy business, we as developers have started doing labor analytic studies. Anytime we go to buy a big site or when we go to build a building, we want to have the answer to the question before we make the investment. So it does drive a lot of our capital allocation decisions today. If you spend any time out in business parks, you’ve always seen help wanted, now hiring signs. You’ll see them more than ever and that does affect decisions that tenants are making, when they’re out in the marketplace, whether they’re doing spec leasing or they’re doing build-to-suit. They’re very, very concerned about labor. So, we have that ammunition upfront so that we’re comfortable when we’ve made an investment in a site for development in South Florida or the Lehigh Valley or when we go to build a building, we know the answer to the question in terms of our clients ability to get labor in there and what it's going to cost and what the availability is.

Yes, Tom, it's right around $115 million a year. And it's called a give or take June of each year. So, it will come in June of '19, June of 2020, and there is a little payment in early '21. And no, we do not need to do 1031. We basically just deferred the gain on those into the years that the cash comes in and that will be taxable income in the year it comes in, but we planned that where we had a cushion and it wouldn't cause any issues.

Thanks just a couple of quick follow-ups. One, I noticed a lot of your starts this quarter were in Atlanta and that seems to be a market that's always targeted as one with a lot of developers and suppliers. Maybe just you can comment on prospects there? And second, I think there was that news article this morning from Cranes that highlighted that Bridge development with developer whom you bought your large portfolio last year. They're under contract to buy a large site in Brooklyn. Maybe it sounds like you're picking a pretty massive development in terms of dollar value. So maybe wanted your thoughts on developing in the boroughs in the future?

Yes, sure, Eric. In terms of Atlanta, a little bit of it is timing, but we do develop in Atlanta in a number of different submarkets. Some of those are larger bulk buildings and a couple of those are what I would call mid-sized multi-tenant buildings. So when we look at that, when we made those decisions particularly on the last couple, we wanted to make sure we were comfortable with our risk and our exposure. The land portfolio is really in good shape right now. So we're comfortable with those decisions. In terms of Bridge, we knew they were going to take the money, we gave them go out and spend it somewhere. So I haven't heard that they were under contract in Brooklyn, but good for them.

Just a quick one on market exposure. Looking at Page 11 in the supplement and the occupancies for the stabilizing service, the one market that seems to just jump out at DC Baltimore which is around 90% and everything else is closer to 100. Just curious, if you can give us a little color on that market?

Yes, we've got one spec building there that came in service earlier this year, Mike. And I think we've got, I think we're about to commit as substantial piece of that. And our holdings there are not that significant compared to some of our others. So on a percentage occupancy basis, it looks a little low, but I think it's really a couple of 100,000 square feet. So it's not really high on our radar, and I think we've got decent activity. And I would say we'll have some substantial leasing done next quarter.

Thanks Brad. I'd like to thank everyone for joining the call today. We look forward to reconvening in our third quarter call scheduled for October 25th. Thank you.