James Connor - Chairman, CEO Mark Denien - CFO Ronald Hubbard - VP, IR Nicholas Anthony - CIO.

Jeremy Metz - BMO Capital Markets Manny Korchman - Citigroup Nick Yulico - Scotiabank Jamie Feldman - Bank of America Merrill Lynch Blaine Heck - Wells Fargo Securities Eric Frankel - Green Street Advisors Ki Bin Kim - SunTrust Robinson Humphrey Michael Carroll - RBC Capital Markets Richard Anderson - SMBC Nikko Securities John Guinee - Stifel, Nicolaus & Company Michael Mueller - JPMorgan.

Ladies and gentlemen, thank you for standing by, and welcome to the Duke Realty First Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I will now like to turn the conference over to your host, Ron Hubbard. Please go ahead..

Thank you. Good afternoon, everyone, and welcome to our first quarter earnings call. Joining me today are Jim Connor, Chairman and CEO; Mark Denien, CFO; 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, 2018, 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 off with a few comments on the national logistics market and then I'll cover our first quarter results. In the national markets according to CBRE vacancy across the U.S. remained at record low level 4.3% and has now been below 5% for over 13 quarters.

First quarter asking rents grew and estimated 8% over the prior year nationally. For the full year, CBRE and other expect rent growth on asking rental rates to be in the 5% to 6% range. For the first quarter supply exceeded demand by about 1.6 million square feet.

So, still fairly in balance and it represents only the third quarter in the last 36 quarters where supply outpaced demands slightly. We see supply and demand in balance for the remainder of the year and expect both to finish in the 200 million square foot range.

We believe this balance combined with historic low vacancy rates will continue to provide an environment for strong rent growth. In addition, the March macroeconomic figures had been solid with favorable retail and e-commerce sales consumer incentive business inventories and employment data points.

Even with 2019 GDP growth projected to be in the low-to-mid 2% range, we still feel confident in the macro demand drivers for logistics space like increased truck tonnage poor traffic and intermodal volume all support a very favorable outlook. Now turning to our own results, we followed up a very strong 2018 with a solid start to 2019.

Given the significant leasing we had in the fourth quarter of 2018, we had a comparatively light quarter with leasing volume of 2.8 million square feet. We simply did not have that many expirations particularly any of any size to renew or backfill. We increased our stabilized occupancy by 40 basis points to 98.4%.

This was primarily driven by leasing up three speculative facilities totaling 927,000 square feet. Our in service portfolio was 95.5% leased. This is down from 96.3% the previous quarter which was due to speculative projects just placed in service as well as a slight impact from acquisitions that were 72% lease.

We renewed 83% of our expiring leases during the quarter and rent growth averaged 23.4% on a GAAP basis and 9% on a cash basis which was impressive given that less than 10% of this activity came from South Florida and there were no second generation leases in any other coastal markets.

Rent growth was broad across all building sizes and all leases sizes as it has been throughout this cycle. Once again, this demonstrates if you have high quality assets in the right sub market with a top-tier operating platform all of which we have, you're in a position to capture demand and rent growth in all markets.

We had a good start to the year and new developments with a $165 million across five projects totaling 2 million square feet. All of these projects were speculative starts in key sub markets with tight fundamentals across our Southern California; Dallas; Houston; and South Florida markets.

Looking at the landscape today, our leasing prospect list is strong for our recently delivered and soon to be delivered spec projects supported by my earlier comment about the stabilization this quarter of three previously delivered spec projects.

We also have a nice backlog of build to suit projects with requirements between 100,000 square feet to over 1 million square feet all across the country.

In aggregate, it's possible our pre-leasing percentage may dip slightly below 50% during 2019 due to timing but overall we're very comfortable with our development pipeline and the speculative projects we have underway and their ability to contribute earnings growth beyond 2019.

Our overall development pipeline at quarter end had 20 projects under construction totaling 9.2 million square feet at a projected $765 million in stabilized costs for our share. These projects are 52% preleased and our margins on the pipeline are expected to continue to be in excess of 20%.

With stabilized occupancy at 98.4% these projects provide a valuable source of future growth. Now I'll turn it over to Nick to cover our acquisition and disposition activities..

Thanks Jim. We had a light quarter on acquisitions and dispositions. Require two state-of-the-art 36 foot clear logistics facilities totaling $78 million in Seattle and Eastern PA. In aggregate, the two assets total 577,000 square feet and were 72% leased on average.

On dispositions we saw on JV asset in Indianapolis with our share of the proceeds totaling $8 million. However, as I alluded to on the January call, we have quite a few assets projected to be sold in our Middle West markets this year with time expected in the third quarter.

Regarding the broader acquisition market, we continue to look at many opportunities. However, the market is extremely competitive and thus making it difficult to find select assets in our target growth market which is reflected in our modest full-year range of guidance for acquisitions.

I'll now turn it over to Mark to discuss our financial results and guidance update..

Thanks, Nick. Good afternoon, everyone. Core FFO for the quarter was $0.33 per share compared to core FFO $0.35 per share in the fourth quarter of 2018.

Core FFO was negatively impacted by an approximate $0.3 per share increase to non-cash general and administrative expense compared to the fourth quarter of 2018 which is a normal first quarter item resulting from the accounting requirement to immediately expense a significant portion of our annual stock based compensation grant that takes place every February.

Core FFO per share increased by 10% from the $0.30 per share deluded reported in the first quarter of 2018 as a result of grocery development as well as continued improved overall operational performance.

We reported FFO was defined by NAREIT of $0.33 per share for the quarter compared to $0.31 per share for the first quarter of 2018 with the increase also being driven by improved overall operational performance. AFFO totaled $119 million for the quarter compared to a $108 million for the first quarter of 2018.

This 10% increase was driven by the same positive factors impacting FFO in addition to lower capital expenditures that our modern portfolio affords us. This impressive AFFO growth continue to be the driver of future dividend growth. Same property NOI growth on a cash basis for the three months ended March 31, 2019, was a very strong 7.2%.

In addition to increased occupancy and rent growth our same property NOI growth this quarter benefited from about 300 basis points of burn off a free rent compared to the first quarter of 2018. This was attributable to some acquisition and development properties that stabilized in late 2017 and had some free rent in early 2018.

Same property NOI for the first quarter on a GAAP basis was 4.3% which is lower than the cash number due largely to the lack of the impact from the free rent burn off on a GAAP basis but nonetheless still very strong.

We do expect subsequent quarters to remain solid based on continued strong rent growth and high occupancy levels but to decelerate a bit from the current level as there will not be as much lift from free rent and 2018 occupancy comparables get tougher.

Also the last half of the year will be negatively impacted by about 40 basis points or about 20 basis points impact for the full-year due to one unique situation. We have a tenant in two different spaces in our same property portfolio totaling about 425,000 square feet. They were looking to consolidate and expand and needed 620,000 square feet.

So, we're building a new building for them which should be completed by the end of the second quarter. This is a great transaction for us and will increase total NOI but will be a drag on same property NOI for the last half the year until we can release their former space.

In addition, we would like to stress that about 14% of our total cash NOI for the first quarter came from our non same property pool and with 73% occupied reflecting substantial NOI growth prospects from this segment of our portfolio. I would now like to address some refinements to our 2019 guidance that we announced yesterday.

First we've increased our guidance for core FFO to a range of $1.39 to $1.45 per deluded share from the previous range of $1.37 to $1.43 per deluded share which equates to $0.2 increase at the midpoint.

We have also increased our guidance for NAREIT FFO to a range of $1.36 to a $1.46 per share from the previous range of $1.33 per share to $1.43 per share.

Although, growth in same property NOI will moderate from the 7.2% reported this quarter, we still expect solid results and have increased our guidance for same property net operating income to a range of 3.5% to 5.0% from the previous range of 3.25% to 4.75%.

We are also revising our guidance for growth in adjusted funds from operations on a share adjusted basis upward to a range of 5.9% to a 11% from the previous range of 5.1% to 10.2%. Finally, we increased our guidance for a stabilize portfolio average percentage least to a range of 97.5% to 98.5% which is up 0.3% at the midpoint.

Now I will turn the call back over to Jim..

Thanks, Mark. In closing, just a couple of comments. Logistic demand drivers for modern facilities remain very strong in both traditional distribution and e-commerce fulfillment.

The macro front maybe a little bumpier than prior years and we are mindful of those risks yet we still feel very good about 2019 as represented by our increase in expected ranges for key growth drivers.

And finally, we are confident in our overall ability to drive high single digit AFFO growth and corresponding dividend growth for the foreseeable future.

We will now open up the lines to the audience, we would ask participants to keep the dialogue to one question or perhaps two short questions, you of course are always welcome to get back in the queue. Louise you can open up the lines for questions..

Thank you. [Operator Instructions] And our first question is from Jeremy Metz. Please go ahead..

Hey guys.

I was just wondering if you could talk about how you think about the trade-offs between pushing rent and occupancy at this stage given the strong rent spreads you achieved and continue to achieve balance against the upward revisions to your occupancy guidance here and just some of your comments on your outlook for supply and demand balance at this point?.

Well thanks, Jeremy. I would tell you that's always a question we're asking and I think at the end of the day when we look at our cash and GAAP rent growth and we look at our CapEx to net effective rent which are both very strong numbers and we were able to improve on occupancy, I think we're really hitting on all cylinders.

We've all talked about this before, it always costs us more capital to retain at a building than it does to renew a tenant. So, if we can continue to keep our renewal percentage high keep our occupancy percentage high but maintain these roughly 25% and 10% rent growth numbers that we're getting I think we'd hit the right balance..

I appreciate, and --..

And on supply and demand, I think we're in a really good spot. The difference between the two of this quarter of 1.6 million square feet in the U.S. logistics market that's one or two deals. So, it could have been timing or anything else.

I think we've all been prepared for a point in this cycle when we're going to reach some level of balance and we may in fact be there. And if we are, I think at 4.3% vacancy that's a pretty good spot and I think we'll continue to be able to maintain our occupancies and continue to push rent growth..

I appreciate it. And just second one from me, I just wanted to touch on the development starts here.

The 170 million in the quarter was all spec, so maybe just what the leasing prospects look like for that as well as what you just placed in to service in the quarter and then from here should we just expect to see that next layer starts to be more tilted to build the suits at this point?.

Yes. As you guys know, quarter-to-quarter it's all timing. I didn't put in the script but we've actually already this quarter signed three builder suits. Would I love to have them in the first quarter? Absolutely. But that's just what it is. So, yes I think you'll continue to see us maintain that balance.

Our builder suit pipeline is as good as it's ever been and it's as I referenced in the script it's anywhere from a 100,000 square feet up to north of a million square feet and pretty consistent across all the markets. So, I think you'll see us continue to have very positive results on the new development pipeline..

Thanks Jim..

Thank you. Our next question is from Manny Korchman. Please go ahead..

Hey guys, good afternoon. Nick, I've got one for you.

If you think about sort of the acquisition pipeline and maybe especially the two acquisitions you closed, why are those buildings I guess leasing quicker? Is it something wrong with the way that the developer and the owner is trying to lease them if demand is so good and you guys proved out the bridge how quickly you can get them lease, why aren't they leasing them before selling them to you or others?.

Well first of all, one asset was already fully leased in Seattle. The other building with we bought in the Lehigh Valley had just delivered and they signed a lease in that and we've got three RFPs on that space right now.

So, we do expect it will you know we underwrite 12 months but we fully expect that we will beat that underwriting like we do typically on other acquisitions we've done. So, I don't think there's not a lack of demand..

And if you look at the rest of the pipeline, are those similar deals whether new out of the ground and either not stabilized yet or getting closer to stabilize or is there going to be a different flavor to sort of value add than that MO?.

You mean the other assets we are pursuing?.

Sure, yes..

Yes. Most of the acquisition we've been pursuing are pretty well leased. In fact, this last acquisition that was half lease was unusual for us. I think it was the first one we've done in the last 18 months..

Thanks, Nick..

Thank you. And our next question is from Nick Yulico. Please go ahead..

Thanks.

Jim, I guess given all the positive commentary on fundamentals and the trends here in the overall market and in your portfolio as well, have you considered increasing development start activity? It is but I guess and just wondering why not?.

Yes we have and we actually talked about that from a guidance perspective and I think as indicated by Jeremy's question with five spec buildings in the first quarter, we thought it would be prudent to wait to reassess at the end of the second quarter and hopefully get a little bit more build to suit volume and a little bit more releasing teed up before we made a move on the development pipeline.

I think sitting here today I would tell you we think it's trending toward the high end of the range that we had announced in January and as we've said feels an awful lot like it has the last couple of years. So, we would hope we'd be able to get these build to suits signed up and be able to give some good news in the second quarter call..

Okay. And then Mark, just question going back to the guidance. I mean it sounds like there are, we should think about occupancy not being as high as we get into the back half of the year.

I guess because I'm just wondering though I mean what's going to what would surprise to the upside there? I mean is it just tenants willing to stay in place more, is it even better leasing on the spec projects I mean what's sort of the upside to occupancy?.

Yes I think Nick it's everything you said, you had around in your head. I would tell you that first off in the first quarter we were surprised a little bit to the upside based on our occupancy levels. We quite frankly did not budget or underwrite than our renewal rate would be as high as it was in the first quarter.

So, that was part of the reason we're already off to a better start in Q1 and what we had budgeted. We do believe occupancy will tick down a bit from here.

One, because as those leases that roll we're pushing rents like Jim said and I don't think that we believe will keep the same retention rate for the remainder of the year that we posted in the first quarter. So, we're anticipating a little downward tick there.

I mentioned the two spaces that we have a tenant in that totaled 425,000 square feet that we know is coming back to us at the end of the second quarter because we're moving into a build to suit. So, that will bring occupancy down as well. So, to the upside it would be the quicker releasing of space like that.

It would be retention rates coming in for the rest of you closer to what they came in in the first quarter compared to our what I would say normal run rate of closer to 75% percent. So, be some combination of all that that could cause it to go to the upside..

Thanks..

Yes..

Thank you. Our next question is from Jamie Feldman. Please go ahead..

Great, thank you. I was hoping you could talk a little bit about the types of demand you're seeing. I think there's been a lot of discussion in the market about smaller tenant demand in some markets versus larger.

Have you seen any split in that along those lines in your portfolio?.

Yes, thanks Jamie. No, we really haven't. We had picked up on some of the chatter and that question some of our peers. So, we took a look at our first quarter results which obviously with only 2.8 million square feet of leasing wasn't a particularly deep pool of data.

So, we went back and looked at all of 2018 as well and the truth is it all performed really well.

I mean I'm not going to kid here for us in actuality, the big space is north of 500,000 feet did perform the best for us in terms of occupancy and rent growth and the smaller under a 100,000 was probably the lowest performing but you're talking about the under 100,000 foot buildings being 97.2% compared to the over 500 at 98.9.

So, they're all really good. Rent growth was probably the strongest in the big buildings at 31 and 10 and 22.4 and 7.1 in the smaller buildings; again really good numbers for any which way you want to slice it and it's funny because a lot of people think of our portfolio and we get a lot of credit for the million square foot Amazon buildings.

But you have to remember that we have 300 buildings out of our 504 that are in service that are under 250,000 feet and that totals 40 million square feet of our 146 million that's in service. So, we've got a fair bit of exposure and we're really active in this size range. So, I'm happy to tell you it's good all over the board..

Okay.

And then as you guys think about growing a portfolio through acquisitions I mean do you have a bias, would you want to get more into kind of smaller footprint and small type assets or are you contend staying investing even more in kind of larger bombers?.

I would tell you under a 100,000 feet we don't have a particularly strong appetite unless it was part of a package or deals like that but between a 100 and a million, it fits in our portfolio like anything else and a number of the one-off deals that Nick and his team have acquired this year and last would fall into that 100,000 to 250,000 square foot category and many of those are multi-tenant building.

So, that's a product type that we've always played in. We're just probably not as well known for that as some of our peers but we've got a lot of that product and we do a lot of that leasing..

Okay.

And the ones that Nick's been buying is that's just more because you can find them or that's more because you felt like you wanted to round out the portfolio with more of that?.

Well, we're really just refining our geography a little bit with those small amount of acquisitions we're doing then using disposition proceeds for it and it's very selective in just a handful of high breed tier one markets. And those assets tend to be a little smaller..

I'm sorry?.

And those assets tend to be a little bit smaller..

Right, okay, alright thank you..

Good..

Thank you. Our next question is from Blaine Heck. Please go ahead..

Thanks, good afternoon. So, you guys are a little slow out of the gate this here on the disposition front relative to kind of the quarterly taste hit guidance. You talked last quarter about getting Midwest dispositions done in the first half.

So, is there anything to read into that related to the appetite for properties and tier two markets? Are sales taking any longer to complete then kind of your expectation or are those sales still on track?.

No, there are no issues. In fact, we have about a 100 million of volume nonrefundable right now that we expect to close very early in the third quarter and we've got most of our target disposition list and various stages of the process.

So, traditionally dispositions have always happened later in the year and we always for whatever reason people wait till the end of the year to get things sold..

Okay, I got it.

And then, maybe sticking with you Nick, on the acquisitions just to get from the 3% in place to the 4.5% stabilized in there, is it just a matter of leasing them up to a stabilized level or is there any rent growth assumption built in there?.

No rent growth assumption built into it, it's just a one unit that needs to get leased up..

Got it, thanks guys..

Thank you. Our next question is from the line of Eric Frankel. Please go ahead..

Thank you. Jim I guess you might have answered my question partially with your comment on the build to suit one this quarter.

But just looking, I understand you have your 50% of kind of prelease minimum requirement for your development pipeline but you combine your unstabilized portfolio with your under developing portfolio I think the occupancy decrease from safe or lease percentage decrease in about 45% about I think 37% or so.

Could you guys, are you guys thinking about altering your measure kind of what your risk cap is in terms of development and unstabilized assets?.

No Eric, I can't tell you -- we're going to start looking at it any differently than I think we historically have. I think a combination of the occupancy of the underdevelopment the in service and the stabilized was the right cross section of all of our occupancy matrix to look at.

And then, as big as we are we have to look at the development pipeline in totality. And we look at every spec project and measure the risk that we're taking on and as we talked in the past, that's not just from a company perspective but also looks at what's going on that business unit.

What we got coming at us in the next 12 to 18 months in terms of lease role. What kind of rent growth and occupancy and that absorption we're seeing in those specific markets. So, I think we got our hand on the pulse of the right matrix, we'll be making all of those decisions.

But we're always happy to talk about slicing and dicing the data differently if there is a better way to do it..

Yes. The only thing I would add to that Eric I like Jim said. The 50% kind of preleased and the development pipeline is an easy thing to talk about. But we got a whole lot more matrix in that and totally that we look at before we pull the trigger on any new..

That's helpful to know, thank you. I just have one follow-up and then I'll go queue back in.

just on the build to suits that you're seeing for the rest of the year, have the margins at all changed for what you're able to offer, I mean it sounds like it's all supplies in check, it still seems that and most like a more even more competitive environment and then what it was a year or two ago.

So, any thoughts on build to suit margins?.

No, our margins, we're projecting our margins to continue to be north of 20% which is where they literally averaged for the last probably 10 years. And that's a makeup of some of the more competitive build to suits, are probably in the mid-to-high teens, maybe 15% to 17%.

And the speculative development particularly on land that we bought right, is probably 25%..

Okay, I'll queue back in, thank you..

Sure..

Thank you. Our next question is from Ki Bin Kim. Please go ahead..

Hey, guys. So, if you look back at the industrial market for the past few years, I don’t think it matter where you owned it, you pay I mean money on it..

We're okay with that..

Yes, and I didn’t make any money on this, well here there goes on our story. So, but going forward, how do you think about long-term market mix. And is it better to buy things in LA four caps even at this point versus and selling assets in the Midwest that low to mid five caps. I just want to get a sense of your broader thoughts on that topic..

Well, keep it up. I'll give you a couple of comments. We've done a pretty good job of analyzing the REIT growth in our portfolio and market dynamics and I think that's one of the big reasons you're seeing us as we've transitioned the company over the last few years pushing into those coastal markets.

Because those coastal markets are where you had historically always gotten the strongest rent growth. When we go into a downturn over sessions, all of the markets are going to move the wrong way but typically those costal markets particularly the high barrier ones that we talk a lot about, those are the markets where you get the greatest returns.

I would tell you our primary focus is on development and not necessarily acquisition, although we do do a bit of that. But I much rather be developing in and as you referenced LA, at a 5.5 as opposed to buy it at a four. But in today's world you're creating value with either one..

And like the asset in 4375 Paris Boulevard, I'll be honest I don’t know if that’s our market, others saw market as a good one or bad one. I know it's only mile or a two mile stop at the other development that you have that was fully leased.

But is development or our build to suit activity taking you away further way from the city center and is there some risk with that?.

Well, if you want to look at individual assets, we do a combination of infill redevelopment and more traditional Greenfield development. So, if you look at what we're doing or what we've done in Southern California, when you go out to Perris in the Moreno Valley, that's more traditional Greenfield development.

But when you go into the IE West and into Orange County where we've done a number of projects, that’s much closer in infield. It has a higher degree of difficulty because you're generally dealing with having to assemble a complicated site. There's probably environmental issues. The development process in California as you know was a challenging one.

So, in order to get the site fully entitled, you probably looking at 12 or 15 months with the work. But again, we do it all, we're doing a lot of infield development, we own a lot of infield properties, we'll continue to have a focus there.

But we're also doing the bigger Greenfield because if you're in the Los Angeles and you need a million square foot distribution center, you can do it in Orange County if it doesn't exist. That's why all those big those big million square footers have gone out to the IE because that's where the land is available for those kind of developments..

Alright, thank you..

Next question is from the line of Michael Carroll. Please go ahead..

Yes, thanks. Tim, I just wanted to touch on I guess your development leasing. I'm sorry if I miss this but I know you recently completed a number of projects where there has been some available space. And last quarter you gave us some pretty good details about the trends of those projects.

I guess are those trends, are you still happy with leasing progress and we should expect to see some leases signed here over the next few quarters, is it still just a prime thing and why some of that space is still available?.

Well you better expect to see some leases because I expect to see some huge sign. We will be in some serious trouble.

No, I'll tell you Michael, the thing that we look at and again you can't get hung-up looking at an individual building because when we underwrite a speculative development irrespective of how good we think it is or how mediocre we think it is, we put in 12 months at least.

And some of those buildings gets leased the first month and some gets leased in month 12 and unfortunately some gets leased in month 18.

If you look across our entire portfolio for the last two years or three years?.

Three..

Three years, we've been averaging across all our speculative development complete lease up and stabilization in month nine. So, we've been running ahead of our underwriting. A lot of winners, a lot coming on on budget but a few losers. And that's what I think you'll continue to see, that's the nature of the beast with speculative development..

Okay.

And the, I guess your highlight on the build to suit pipeline, should we read into that since you started for the many spec projects in 1Q that you're going to be more focused on build to suit less on spec over the next few quarters or a spec's still interesting to you?.

No, spec is still very interesting to us and we're always focused on build to suit because that's what has enabled us to drive new development to the levels that we have. What I would tell you and we've talked about this from time-to-time when I've referenced our development pipeline may dip below 50%.

As we have worked our way into high barrier markets like Northern New Jersey and further into the Southern California infield markets like Orange County and even in Dade County where we have some very expensive land tied up. It pays for us to put that into production absolutely as soon as we can.

So, in years gone by, I might have wanted to move some of those around from quarter-to-quarter to maintain that 50%, but in these instances we think the market is strong enough and the carry on the land is significant enough that we're probably going to move ahead and put those into production as soon as possible.

And that's what driving that, what's behind my statement of where it may dip below, it's not going to go to 35% or 40%.

But we just may choose from a timing perspective to move ahead with a few spec projects sooner than we thought we would have in the past but you'll also continue to see just as I referenced earlier since we already signed three build to suits have a good number of build to suit projects..

Okay, thank you..

Thank you. [Operator Instructions] And we'll go to the line of Richard Anderson. Please go ahead..

Thanks, good afternoon. So, Jim or anyone, I wonder if you could talk a little bit about obsolescence, not maybe this year but as the business of logistics moves closer in and this kind of been just underwriting this call, away from perhaps these huge fulfilment centers into smaller spaces. Even Amazon is doing that more and more.

What is an alternative us of a million two square foot rectangle..

Well, we've talked in the past, we've never lost Amazon from any one of our facilities, now that isn’t to say they haven’t moved out and so and eventually someday they'll move out of lot. And as we've spent a lot of time --..

They moved out of Coffeyville I believe I recall reading that but that's a long time ago. Anyway, okay..

That wasn’t one of our projects..

I know, yes..

So, but you know what, some day they will, you're absolutely right. And what we want to remind everybody is we own just the box, okay we don’t own any of the material, handling, equipment or mezzanines or robotics or anything like that. And we've got restoration costs.

So, at the end of the day I own a good clean functional 1.2 million 1.1 whatever the size is box with plenty of parking and plenty of tailor storage, plenty of loading facilities.

That building can be released to Walmart, to Procter & Gamble to target, that building could be divided into half or quarters, I can do 500,000 foot leases or 300,000 foot leases.

So, we've always got an eye towards the future in any of our development whether it's speculative of build to suit and we think we've underwritten those at the right basis that at the end of that lease term if we were to lose in Amazon, we'll be able to compete for deals very favorably..

Rich, the other thing I would say is these, take Amazon for example, these 90,000 80,000 square foot buildings are not replacing anything, and they're purely additive to their supply chain. They also still serviced by these fulfilment centers.

So, it's just maybe that the fulfilment center is servicing both the direct and consumer and those delivery stations or whatever you want to call them. So, they're not replacing anything, they're just additive to their supply chain..

Okay, fair enough. And then another thing that was touched on then and on off was explicitly answered, you don’t have a bent either way about having your average asset size go higher or lower over the course of the next few years.

Do you or you're thinking in terms of well maybe you said 100,000 or a million square feet fit into our kind of business model.

Are you kind of showing your cards a little bit that they'll be willing to get a little bit smaller?.

Yes, I would tell you we do not have a component of our strategic plan or our annual budget. That says we want to get our average building size bigger or our average tenant size bigger or the inverse, smaller by any stretch of the imagination. Our local operating teams are out just trying to do good quality business.

And we own, we still own, I'm looking at the latest numbers here, we still own 95 buildings under a 100,000 square feet, 202 between a 100,000 and 250,000 feet, a 140 between 250 and 500 and 87 over 500. I mean that's pretty good balance across all sizes. And I'd happily take more of any of those..

Yes, and if you look at our pipeline of what we're building Rich, we're building everything from a 140 to a million and everything in between..

Yes..

It's more about where the asset is and what it's going to serve and how big the asset is..

So, size doesn't matter, is that right?.

Rich, I'm not going there, buddy, not on a public line..

I kind of partially stumped, okay you guys stumbled first time, alright thanks, that's all..

Our next question is from John Guinee. Please go ahead..

Great, thank you. Mark, by the way you're building a 77,000 foot building in Indianapolis to say now..

That's true, I forgot about that one..

True John, you're right..

So, big picture, Jim. Not all these sub markets are created equal and some of them are basically out of land clearly out of Greenfield land and into repurposing land. Can you talk about the bigger markets say Atlanta, Dallas, Chicago, you guys have a great team in Atlanta, great team in Dallas.

Maybe whatever markets you care about that where are you essentially out of land and where particularly with sub markets as the DFW sub market and then where are those land as far as the eye can see and then take it into the ability to have long-term pricing power in these markets where you're essentially out of land?.

Well John, you've hit on what is the key to some of these Tier 1 markets, I do we might have some data handy because I thought we might get this question.

So, if you take Dallas for example which by and large in its entirety is reasonably healthy, has good strong net absorption but you drill down to the sub market level and you go to on the South Dallas and we've all talked about South Dallas before.

No barriers to entry, plenty of available land, good expressway access, reasonably new intermodal and a vacancy in South Dallas is 15.3%. So, like four times the national average. You go to the DFW sub market which you and I would call infill and there's very little available land, there vacancy is 6%. If you go to Chicago, it's the same extreme.

You go under the I80 corridor, again not a lot of barriers to entry, good expressway access and the vacancy down there is a 11.7%. You go to the O'Hare Market, we've all been in toward through the O'Hare Market. It's 2.4% vacancy.

So, you're absolutely right, not only do you not have pricing power today when the vacancy in those overbuilt markets, is where it is but you can anticipate having any pricing power over the long-term.

So, when if you have a building down there and you got lease role coming at you, your tenant probably has the opportunity to look at a number of different spec buildings or potentially go to a build to suit whereas you go to these infill markets around the airport - and some of the other high barrier Tier 1 markets that we've talked about and those opportunities don’t avail themselves and which is why you can generally get up to twice the rent growth in those markets that you can and some of these low barrier markets..

Well said, good job, thanks..

The next question is from the line of Michael Mueller. Please go ahead..

Yes, hi. I guess in the released upfront, you called out that you're going to have a little level of lease for wherever the rest of 2019.

Because I'm curious, is there anything you need to you're trying to point out about this year that you are trying to get us focused on because when I like at the first quarter '18 stop, it was the same exact dynamic..

No, I don’t necessarily think so, Michael. I think it's just its lower risk. I mean, we may not have the ability to push rent growth quite as much as some of our peers but at the same time there is a risk related to do in that. So, it's a little bit around the guidance that we gave on same proper NOI.

That's another reason that it will decelerate a little bit for the remainder of the year because we won't be rowing as many tenants as maybe we would like to in this environment. But in the long run we like the balance of what we have..

Okay, so it's nothing really atypical about this year then?.

Not necessarily, I think this year was still a little lower than the past because we did just a tremendous amount of pull forwards in the fourth quarter that we talked about on the fourth quarter call. And when I say pull forwards, some of them were just four to six months early, not like they were dramatically early.

But we just took care of more of this year's expirations at the end of last year than I think would be normal, not a lot more but a little bit more..

Got it, okay. That was it, thank you..

Thank you. [Operator Instructions] And we'll move to the line of Eric Frankel. Please go ahead..

Thank you. I think one market and then I just want maybe some we might have some better clarity on, is Atlanta we've done some spec development.

Can you just describe the recent activity there and how quickly you're taking the lease up your recent development?.

Yes, we got really activity down there and I note when you look at Atlanta in its entirety, people see 6%, that's actually down first quarter of 2018, it was 6.8%. And I think Atlanta had depending on who you talked to, 18 million square feet plus or minus. So, a lot of good activity.

But there is as you pointed Eric, a fair bit of development down there. So, we've got three buildings. One of which is 589, one of which is a 193, hold on I'm searching for the other one. The other one's 498. The 498 is I'm looking at a prospect list right now, we got two good prospects.

The 193, we've signed a lease for over a half of that building that will be announced at the second quarter. So, we got over 90,000 feet there left and my sheet says we got two prospects for that. And then, the big building the 598, we got three prospects forward.

And so, we're continuing to see good demand across the board and we always are evaluating at this point in the cycle whether we want to hold out for full building tenants or we're into break the building up. And that's a little bit of what's going on depending on the kind of activity that we're seeing.

But again, those buildings have a fair bit of flexibility. So, we can do single tenant dealings or we can break the building up and lease it to two different tenants..

Okay. And then maybe another market just to touch on Central PA, any concerns there, I hear that recent activity is a little bit softer and there's since there has been a lot that in development it's going to be coming online in the next few quarters..

Yes, as I mentioned in the past, Central PA is has been a little bit slow, we've got a big building there, looking forward on my list here, 832. We got one full building prospected to partial building prospects, half and then three quarters of the building.

So, I would tell you activity is good but that building came into service in the third quarter of last year. And as I like to remind my leasing team out there, I think it's ripe for leasing..

Okay. So alright, we'll see it happen.

Are there any tenants on the watch list in terms of credit that's that we should know about or there might be a factor in same-store guidance?.

No, nothing new other than we do have one tenant, one new event I guess you'd say, ZGallerie filed bankruptcy back in March. They are current on the rent, they're down in about 200,000 square feet in Atlanta. From everything we've been told, it's a chapter 11 situation, the facility is pretty critical. Those are a supply chain.

So, we think it'll be business as usual but if something were to change in that, the rent is below market. So, I think it would be a situation of kind of like the HH spreads, there'd be a period of time to retenant it if that would happen but it be at better rounds. Other than that, nothing new Eric..

Okay, final question. You might have seen pretty sure heard of off from the Journo yesterday about a fairly large portfolio platform coming online that might come to market this year.

Do you think there's actual appetites to take down a super large portfolio that's worth say $15 billion or $20 billion?.

Eric, on that I don’t know that order of magnitude, there is an awful lot of dry powder out there chasing logistics properties and I think a number of the deals that have been done over the last couple of years in the let's call it $3 billion to $7 billion range, have had multiple bidders. So, I don’t think it's out of the question.

I don’t think it's out of the question that you could create a partnership that could take down a project of that magnitude. But I was selling guys earlier. Looking at big deals like that, it's a little bit like shopping for a new big boat. It's really fun to look at it and talk about it but it's financially hard to do..

Yes, understood, okay thank you..

And there are no further question. Thank you..

I want to thank everyone for joining the call today. We look forward to see many of you at the NAREIT conference in New York in early June. With that, you may disconnect the line..

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and we're using AT&T Executive Teleconference. You may now disconnect..