Duke Realty's (DRE) CEO James Connor on Q1 2016 Results - Earnings Call Transcript

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Duke Realty Corp. (NYSE:DRE)

Q1 2016 Results Earnings Conference Call

April 28, 2016, 03:00 PM ET

Executives

Ronald Hubbard - Vice President of Investor Relations

James Connor - President, Chief Executive Officer

Mark Denien - Executive Vice President and Chief Financial Officer

Analysts

Ki Bin Kim - SunTrust Robinson Humphrey

Juan Sanabria - Bank of America Merrill Lynch

Eric Frankel - Green Street Advisors

John Guinee - Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Duke Realty Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, will be an opportunity for question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded.

I’d now like to turn the call over to the VP Investor of Relations, Ron Hubbard. Please go ahead.

Ronald Hubbard

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

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

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

James Connor

Thanks, Ron and good afternoon everybody. Today I'll cover our key performance metrics for the quarter, then touch on highlights in leasing, development and dispositions, then I'll finish with an outlook on our business. Mark, will go over the first quarter financial performance, as well as the balance sheet activity.

We followed up a very strong 2015 with a great start to 2016. We increased our overall occupancy, including projects under development from 94.2% last quarter to 94.7% this quarter.

We ended the first quarter with in-service occupancy at 95.7, down 70% basis points from year end. This entire decrease was attributable to spec development projects that was placed in service this quarter, including 1.1 million square foot industrial facility in Lehigh Valley that was delivered on at zero percent leased.

We're very optimistic about the leasing prospects, given the strong demand outlook driven by ecommerce and consumer products companies that serve major Northeast markets.

When you exclude the impact of those spec developments, we actually increased our in-service occupancy by over 25 basis points. Nationally, the industrial market momentum continues to be very strong, demand outpaced supply for the 24 straight quarter, new supply in substantially all markets is in balance and demand for modern bulk space is still very high.

Preliminary net observation numbers for the first quarter are coming in around 60 million square feet. This is the second strongest first quarter since 2000. New supply in the first quarter was about 39 million square feet, resulting in another 10 basis point drop in vacancies nationwide to approximately 5.6%. Our outlook is for these fundamentals to continue to be favorable for the remainder of 2016.

We're seeing similar strength in our portfolio with the completion of 7.3 million square feet of leasing during the quarter. Notable activity this quarter includes 495,000 square foot lease signed for an entire speculative project in Northern New Jersey we started in the fourth quarter of 2015.

We also executed three renewal leases signed at the Port of Savannah totaling 646,000 square feet to a single 3PL customer. Our occupancy net market is up to 100%, that’s up from the 86% range in early 2015.

The largest drivers for leasing in our portfolio continue to be ecommerce, consumer products, both directly with our corporate clients and indirectly with 3PLs, as well as the food and beverage industry.

With the strong leasing activity and our in-service portfolio of occupancy in the 96% range since the middle of 2014, we continue to be able to push rents as indicated by rent growth on our renewal industrial leases at over 15%.

In our medical office portfolio, we continue to have good momentum with our in-service occupancy emerging up slightly to 95.6% which is an all time record. We also have a strong pipeline for future development to go along with our existing development pipeline.

Our industrial development during the quarter, we started $161 million of industrial progress, totaling 2.6 million square feet about 87% pre-leased in the aggregate. These new projects include two builder suite deals totaling over 1.9 million square feet. The first deal is a 1.2 million square foot project with a 10 lease term in the Inland Empire East submarket to an ecommerce company that is a repeat customer.

The second builder suite is a 715,000 square facility in our St. Louis market for a 15 year lease term. This facility will be delivered to a new customer buyers, a large UK based public company that focuses on the health and personal care business.

Our development pipeline at quarter end had 27 projects under construction totaling 8.7 million square feet and a projected $694 million in stabilize cost at our share that are 79% pre-leased. We expect these projects to create 20% margins and generate about a 6.8% initial stabilized cash yield. We believe these margins are especially impressive due to the relatively low risk nature of the pipeline given that it’s nearly 80% pre-leased.

Our development outlook is very solid with a pipeline of prospects that could - should continue to create value creation opportunities for the remainder of the year. Our land inventory now sits at $383 million, as a result of monetizing over $50 million of land in the quarter. This is our lowest inventory since 2004 and is another significant milestone for us. As I stated in 2014, our goal was to get and maintain our land bank of between $350 million and $400 million.

In capital recycling activity, we closed $90 million of building sales during the quarter across five transactions, four of which were suburban office deals that represents roughly 90% of this quarters disposition proceeds. I'll note we expect a large amount of disposition closings late in the second and early in the third quarter. This was anticipated and is consistent with our affirmation of guidance in the last nigh press release.

Now, let me turn it over to Mark, to discuss the financial results and capital transactions.

Mark Denien

Thanks, Jim. Good afternoon, everyone. Core FFO was $0.28 per share for the first quarter of 2016 compared to $0.29 per share for the fourth quarter of 2015. The decrease in core FFO was due to higher general and administrative expenses in the first quarter consistent with previous years and expectations, due to the accounting rules of acquired immediately expense a substantial portion of our annual stock compensation grant. This was partially offset by continued improvement in our overall real estate operations.

We generated $0.26 per share in AFFO for the quarter, which compares favorably to $0.24 per share in the fourth quarter of 2015 and equates to a dividend payout ratio of 69%.

Same-property NOI growth for the 12 and three months ended March 31, 2016 was 5.0 and 6.0% respectively. This growth is result of both increased occupancy and rental rates within our same property population.

I would point the decrease in same property operating expenses this quarter really had no impact on overall same property NOI since virtually all of these savings were passed on to the tenants through lower reimbursement revenue, particularly with such occupancy levels.

We do not modify our same property NOI growth guidance for the year because it obviously tougher to grow occupancy at the same rate we have been experiencing and there was still some overall economic uncertainty with still eight months left in the year.

Having said all those, if the leasing momentum continues it looks like we will be trending much closer to the top end of our guidance of 4.25% for the year. The proceeds of the building sold that Jim mentioned were used to fund the quarters development activity.

On April 1, we also received a $184 million partial repayment of the $200 million in seller financing that we provided for last year’s suburban office disposition. We use these proceeds to repay the $148 million that was outstanding on our line of credit at March 31, 2016. And we used the remaining proceeds to fund for the development.

Our next significant debt maturity is a 5.9%, $390 million secured loan that matures in November and maybe repaid without penalty in May of this year. We will ultimately repay this maturity with proceeds from property dispositions, but due the fact that most of the 2016 dispositions are expected to close in the second half of the year we will temporarily utilize our line of credit to repay this loan in May.

We reported a fixed charge coverage ratio of 3.1 time for the rolling 12 months ended March 31, 2016, compared to the 2.5 times we reported one year ago. We expect to see continued improvement throughout the year as we utilize disposition proceeds and further reduce leverage and as higher coupon maturing debt was replaced with overall lower borrowing cost.

Net debt to EBITDA for the rolling 12 months ended March 31, 2016 was 6.2 times compared to the 6.9 times that we reported for the rolling 12 months one year ago. Pro forma net debt to EBITDA for the three months ended March 31, 2016 was 6.0 times when adjusted reflect the aforementioned $184 million sole financing repayment.

We were in a excellent liquidity position and expect to further improve our balance sheet and leverage metrics as the year progresses as outlined our guidance. I am very happy to report another excellent quarter.

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

James Connor

Thanks, Mark. Yesterday, we all of our guidance metrics laid out in late January, including our guidance for core FFO for 2016 of $1.15 to $1.21 per share and AFFO of a $1.02 to $1.08 per share.

In summary, we're very pleased with the results in the first quarter and optimistic about leading our goals laid out for 2016. We believe our development and operating platform can continue to outperform over the long-term.

With superior asset quality for today's customers including large, bulk assets that meet the unique demands of sophisticated ecommerce retailers, leveraging our 40 plus years development experience and our deep regional team to generate value creating industrial and MOB development projects, we'll utilize the proceeds from planned asset dispositions to self fund our development pipeline for this foreseeable future.

We'll continue to reduce leverage on top of what is already a best in class balance sheet and be in position to take advantage of future investments opportunities. We believe all of this sets the stage for consistent AFFO growth, which coupled with our sector low dividend payout ratio should provide for future dividend increases.

We'll now open up the lines for the audience. We ask participants to keep the dialog to one question or perhaps two very short questions and of course you're welcome to get back in the queue.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question will come from the line of Manny Korchman. Please go ahead.

Unidentified Analyst

Hey. Good afternoon, guys. It looks like Houston occupancy is holding up, almost 99%. Is that the same thing you're seeing on the ground? Or are you seeing anything changing on the ground there? If you can give us an update on Houston?

James Connor

Yes, Manny. I would tell you, I think activity level in Houston has been pretty consistent for the last three or four months, I mean we’re going to win. We’ve all seen the impact in the local economy from the energy sector. I’m happy to report we don’t have a great deal of exposure in Houston and our Houston portfolio is very stable.

We have modest activity on the vacancies that we do have and I'd like to believe we make a little bit of progress between now and the end of the year, but I don’t think you'll see a great deal of development opportunity down there for the short term.

Unidentified Analyst

Great. Maybe if we can talk about the transaction markets. You and Pierce have all said the industrial markets are certainly frothy and hard to buy anything. Is it the same in the MOB market or have you seen some opportunities? How much appetite do you have to acquire additional MOB properties?

James Connor

Well, I think we always have an appetite to acquire as long as we convince our sales and our investors that we're creating value. And I think what you're seeing with current pricing levels for good quality MOB product across the country is very consistent with what you're seeing at MLB. There is a great deal of demand, more demand and there is supply. It’s very much a sector that is in favor.

So not a great many opportunities out there and certainly no really big good quality portfolios. But I expect if there were any they'd be at pricing point that we find very hard to stomach.

Unidentified Analyst

Great. Thanks, guys.

Operator

Next we'll go to the line of Ki Bin Kim [SunTrust Robinson Humphrey] Please go ahead.

Ki Bin Kim

Thank you. Could you describe the amount of demand coming from e-commerce-related companies when it comes to leasing your development pipeline? Or for new space relative to just overall industry-wide expansion?

James Connor

Sure, Ki Bin. That’s a topic we all chatted about and there is been a lot of research done. I've explained from our perspective it’s really easy to get your arms around an Amazon.com or Walmart.com, a dedicated fulfillment facility, those are easy to track.

What's a little bit more difficult is our consumer products and retail customers that are continuing to expand and what portion of that expansion is directly attributable to ecommerce and what percentage is directly attributable to their more traditional bricks and mortar retail sales.

And then the other complicating factor is you know, there are number of very good high quality 3PL providers out there, that are doing ecommerce fulfillment for small and mid size companies and again, that’s not easy to get your arms around.

There is been a lot of research lately that says ecommerce has probably provided some where in the range of 20% to 30% of the industrial demand that we've seen in this cycle and on the surface I think those are reasonable numbers. It has clearly been a large benefit factor to our growth, as evidence by the number of facilities that we've done and the types of facilities that we've done. So I hope that answers it?

Ki Bin Kim

And related to that, and if I look at your portfolio and where your assets are located for the industrial portion, I would say a lot more Chicago, Indianapolis, more of the regional markets, this seems like versus the major gateway cities like LA or New York.

How does that play into where the e-commerce companies want to develop their newer facilities closer to the customer? And does that have any impact on how you want to reposition the portfolio?

James Connor

I think there is two or three questions here. So first in terms of our portfolio, for many years we were viewed as a min-western company and sitting here today about 44% of our NOI comes from Tier 1 industrial markets around the country. So I think we've done a lot in the last few years to really change that perception.

Clearly, ecommerce fulfillment, the entire country has benefited from it, many years ago the locations were driven in a lot of instances by Internet and Internet related sales taxes an where they were today that’s pretty an issue that’s been taken away.

The large fulfillment centers are still all over the country and they are 800 to a 1 million square feet. We've seen a lot of headlines with the smaller infill last mile, and those facilities typically are probably in that 50,000 square foot range.

And I think you'll continue to see those, the reality though is you only need those in some of the top metro areas where you got population and logistical concerns, I've used this example a number of times in rules with investors and analysts, taking Amazon for example, they have four facility in Indianapolis and from anyone of those facilities you can get to anywhere in Indianapolis inside of an hour.

So that’s just one example of a typical US second Tier city. That doesn’t really need any infill last mile leasing opportunities. But I think you will continue to see those in the major metro areas, as they continue to fill out their logistics and supply chain.

Ki Bin Kim

Okay. Thank you.

Operator

The next question will come from the line of Juan Sanabria [Bank of America Merrill Lynch] Please go ahead.

Juan Sanabria

Hi. Good afternoon, guys. Thanks for the time. Just a question on the dispositions for the year in the suburban office market. What are you guys seeing in terms of pricing, cap rate expectations and the types of buyers and their use of financing?

James Connor

Well, I'll make a couple of comments. I think we're still seeing really strong activity for good core assets in the first Tier markets. I think we're seeing good activity in the second Tier markets as long as again, its good quality product.

I think we started to see in some of the second and third Tier markets for some one-off or maybe some B assets. I think we've seen the buyer pool thin a little bit. For everything that we have sold this year or that we have in the pipeline, we're continuing to be able to achieve the pricing expectations we have, so we have not seen an impact on pricing. But obviously that’s subject is near to all of our hearts and we keep a very good eye on that.

Juan Sanabria

And any ranges you can give on cap rate expectations?

James Connor

I think Juan earlier in the year we said it would be probably somewhere around the mid-70s and I think we're still pretty comfortable with that guidance overall. I mean, you'll probably see a pretty wide range, but overall for what we have in our guidance I think min-70 is right in the ballpark.

Juan Sanabria

Great. Just a quick follow-up. Any sense of re-leasing expectations you can give us for what you're thinking for the balance of the year, both in the bulk and the MOB space that were very strong in the first quarter, particularly the MOBs? What's a sustainable number in your view?

James Connor

From an occupancy standpoint?

Juan Sanabria

Releasing spread, sorry.

James Connor

Oh, releasing spreads. So we reported 15% on a GAAP basis, I would tell you that, we think that rents are still holding up very strong out there and I think we can continue at about that pace based on what we have coming out for the foreseeable future.

Juan Sanabria

Thank you.

Operator

Next we'll go to the line of Eric Frankel [Green Street Advisors] Please go ahead.

Eric Frankel

Thank you. I was hoping you could touch upon the leasing activity for probably some of your larger vacancies in Indianapolis and Pennsylvania on the spec development side.

Mark Denien

Yes, sure Eric. I would tell you, we've got great activity on all of those, sitting here a month into the second quarter, I am anticipating a very good outlook for when we report numbers in the second quarter just based on the activity that we're seeing.

With the exception of just a couple of assets, we've got mid-size vacancy in Kansas City of about 400,000 feet and that market is been a little slow, couple of vacancies in Houston, which I touched on earlier. But other than that, we’ve got really strong activity. So I don’t – I’m not anticipating any problems or extended lease ups on any of our new speculative projects.

Eric Frankel

Great. Touching upon the land bank, as you described in your introductory comments, do you see yourselves bulking up on land? Is it challenging to find good land parcels in the markets you want to be in, I guess what you would call your Tier 1 markets? I also noticed you reclassified some assets in your non-strategic bucket. That increase looks like $15 million to $105 million. What's exactly included in that now?

Mark Denien

I'll cover the last question Eric, the reclassification is our remaining land parcels that we have in Phoenix. We announced that we were exiting the Phoenix market, we made one of the little parcels, but it’s mainly Phoenix land and we've already sold some of those assets or included in first quarter dispositions and the rest of its in various stages, it should close here in the second quarter.

So that’s the increase in the land, reclassification should see and I'll let Jim cover the demand for land and other markets.

James Connor

Yes, Eric, let me be very clear, we will not, I repeat not, be bolting upon land. Its taken us a quite a while to get this land inventory down whoever want it, part of the challenge was selling off that non-strategic land, a lot of which was office land you know, we've benefited from the strength of this recovery.

So being able to sell that to users, other developers, sell it for other uses, multi family and retail and some instances. But we work really diligently to change the culture here and as I said originally we think we can run this company with a land bank quarter-to-quarter in that $350 million to $400 million range. So that’s our goal going forward.

Eric Frankel

Great. Thank you.

Operator

The next question comes from the line of Blaine Heck. Please go ahead.

Unidentified Analyst

Hey, guys. can you just talk a little bit more about the Pennsylvania industrial market and like some of the comments one of your peers made that was a tough market and over supplied and especially given the un-leased delivery you guys had in that market this quarter?

James Connor

Yes, Blaine I’ll tell you, I’m a little surprised at some of the questions regarding particularly the Lehigh Valley because that’s a market today and although there is a handful of big bulk buildings, you are still talking about vacancy in that overall market is less than 4% and really strong demand particularly as I said earlier with the ecommerce and the consumer products companies, because that is the big regional bulk distribution markets that services that entire Northeast US population base.

So given the activity we’re seeing on our single 1.1 million square foot building, I would tell you I’m not concerned about that market either from a supply perspective or demand perspective.

And I think switching over to New Jersey the fact that we pre-leased roughly 500,000 foot spec building before it was even done, you know, speak to the strength of that marketplace. So I think some of that concerns are little misplaced.

Unidentified Analyst

Sure. Okay. , that’s good news. And then kind of related to Eric’s question, looks like you have a couple of developments that are projected in service in next quarter that are vacant especially 615,000 square foot in Atlanta, 403,000 in Chicago.

So I was hoping if you guys could just talk about how leasing was going on there and whether you think those could be a drag on occupancy next quarter similar to kind of the situation we saw this quarter?

James Connor

Well, Blaine I will tell you my expectation based on the activity that we have today and we have really good activity on all of those, particularly Atlanta and Chicago, I don’t know that we’ll get them all leased or get them half leased, but I’m not anticipating that those are going to be a drag for an extended period of time.

We’ve got really good activity as I highlighted with Eric, there is really only a couple of places that concern you right now and Atlanta and Chicago certainly aren’t on that list.

Mark Denien

The last thing I would add to that Blaine is may be a drag on reported occupancy like we reported this quarter when Pennsylvania went in service, but won’t be a drag relative to our guidance that we gave, because when we do the spec projects, it varies from market to market and project by project.

But on average we generally project about a six month lease up period and we’ve been in most all cases exceeding that. So, there is some drag already in our FFO and AFFO numbers expected just to get those leased up.

Unidentified Analyst

Okay, great. That’s helpful. Thanks.

Operator

The next question comes from line of John Guinee [Stifel Nicolaus] Please go ahead.

Erin Aslakson

Hi. It’s actually Erin Aslakson here. I wanted to ask actually about the reasons behind your exiting and classification and non-strategic of Phoenix?

James Connor

Sure, Eric. We've been operating in Phoenix for - I’m going to say probably about six or seven years and from our perspective it’s – it’s primarily been a spec building, spec development or spec building market not a lot of build to suite activity and it tends to get over build fairly, quickly.

So as we looked at with our long-term growth plans and again we had four wholly owned buildings out there and one joint venture building, and one land site, it really just didn’t play a key strategic role in our trying to grow on the West Coast. So we decided to take advantage of good pricing in the marketplace, sell those assets and really focus our energy on the West Coast.

Erin Aslakson

And those were all in a good year sub-market correct?

James Connor

That is correct.

Erin Aslakson

Okay. Thank you.

Operator

Next we will go to the line of Sumit Sharma. Please go ahead.

Unidentified Analyst

Hi, guys. I was wondering as you're taking a follow-up from Manny, the earlier question on buying MOB assets, I guess what I'm wondering is given the compression in cap rates on the MOB side, are there any thoughts on disposing some of them?

James Connor

Sumit, we proved that portfolio, the MOB portfolio that is in late 2013 and early 2014 of about $315 million of non-strategic assets. We did the same on the industrial portfolio in 2015, so both of those portfolios are in pretty good shape. Right now all of our disposition energy is really focusing on exiting the office portfolio.

It maybe – yes, it would surprise me if we looked at pruning some additional industrial maybe, some additional MOB in 2017 or 2018. But right now we’re really focused on selling the office assets, so that we can at the end of the year be completely out of the office business.

Unidentified Analyst

Understood, understood. Actually, another question around developments this time. So a lot has been said about the supply and demand equilibrium approaching in late 2016, 2017. I think a peer of yours has been pretty vocal over the last few quarters. To borrow a page from the multi-family guys, development yields are getting pressured. So are you seeing any signs similar to this on the warehouse front? Or the fact now or perhaps more interested in looking towards your outlook into 2017 and 2018?

James Connor

Well I would say, I think most people in this sector were very pleasantly surprised with 60 million square feet of net absorption. And I think if we continue to see that level of activity in the second quarter, I think that will push back everybody’s expected equilibrium timing to probably sometime later into 2017, which I think is good for all of us.

In terms of competition and margins on our industrial development business, yes there is a lot of pressure out there and there is a lot of good effective competition. But one of the things I’m proud of all of our guys is we've been able to, throughout this cycle maintain our development margins right in that kind of 19% to 21% or 22% for both the industrial and the MOB business.

So we've got really good teams on the ground. We've got really good lane to support that development. For the most part it’s fully entitled and ready to go and we're proven developers. So our clients trust us when we can commit to development schedule. So we've been able to use that to our advantage.

Unidentified Analyst

Very good. Thank you so much.

Operator

The next question comes from the line of Michael Carroll. Please go ahead.

Unidentified Analyst

Yes thanks. Can you remind us your hurdles that you like to achieve before breaking on new projects are you still willing to start spec projects or you more focused on other right now?

James Connor

Well Mike, we’re always focused on build to suits, as my counterpart over here likes to remind me, one thing he can be assured of is the yield on the build to suit is much more stable than that on the spec development. But we look at our overall development pipeline, which is just under $700 million right now.

And we've kind of set the floor at 50% and as you all will remember we did down below 50% briefly last year and when we do that, we like to be able to tell our investors in advance and tell them why and that was basically the timing of some spec projects. And we also are committed that we worked that backup and we had a lot of really good leasing on the spec side.

So we are evaluating spec development opportunities in the portfolio right now. And I think when the weather gets a little better in some of the Mid-Western and North Eastern markets its probably not unreasonable for us to start a few more projects because we are in really good shape on our development pipeline.

Unidentified Analyst

Great, thanks. And Mark, can you remind us about the Starwood financing? Do you expect to get all of that repaid this year? I think you said in your comments that some of it was partially paid off.

Mark Denien

Yes, no we expected all, its all due by the end of the year. Its $200 million in total and we already got $184 of it, so there is only $16 million left and we will get that before the end of the year.

Unidentified Analyst

Great. Thank you.

Operator

[Operator Instructions] The next question comes from the line of Richard Schiller. Please go ahead.

Unidentified Analyst

Good afternoon, guys. We spoke about the re-leasing spreads earlier and those were positive. However, it seemed like the term on bulk distribution renewals was down from 2015. Is there anything to read into that there?

James Connor

No, I don’t think so, I think that was just kind of an exception for one quarter. That’s one of the first thing that caught Mark's my attention and most of the bulk steps we're seeing now is as a general rule, probably averaging closure to six years. So I think that is just a little nomination in the first quarter.

Unidentified Analyst

Okay, great, thanks. And then finally, after you guys get through selling the rest of the suburban office portfolio, you'll probably be around 80%/ 20% between office and MOB. Looking out to 2017, where do you see these percentages, if you have thought about that?

James Connor

Well, we thought lot about it, we haven’t really set hard from targets, because primarily we’re out chasing new development and both build to suits and some speculative on industrial. And as you know most of the MLB business really looks and functions like build to suits. So we’re out chasing it much as that as we can get.

So you know, if that would go to 78:22 or if it was to go to 82:18, I don’t think it would really bother us, we don’t have any hard targets, we are not just chasing good value creation right now.

Unidentified Analyst

Okay, makes sense. Thanks guys.

Operator

The next question comes from the line of Eric Frankel [Green Street Advisors] Please go ahead.

Eric Frankel

Thank you. This might be a moot point the next quarter or two, but we did notice that your office occupancy declined roughly 300 basis points to 83%. Is that affecting the sale process in any shape or form?

James Connor

No, Eric I would comment that’s solely due to asset mix, the assets we disposed, were much more highly leased in the assets that we still own, and we’re still headed down the same path on the marketing and really have no impact. So it should from dispositions, it is not to losing organic occupancy if you will.

Eric Frankel

Okay. And I know we beat e-commerce -- we already talked about e-commerce a bunch this call, but I was hoping you could comment on smaller build-to-suits, maybe those that are a little bit closer to city centers. I know you guys have worked on really large fulfillment centers that are over 500,000 square feet or 1 million square feet or so. But I was hoping you could comment on maybe procuring those types of redevelopments in the future, maybe in the markets where you guys are most active.

James Connor

Yes sure Eric, I will make a couple of points. Actually most of those just go to traditional either first or second generation leasing, none of those given their size, that I’m aware of has gone to build-suit, they are typically 50 to 75,000 feet and they take existing inventory they are looking for the right location.

We've been historically over the years, we've done a great deal of in fill redevelopment, so that’s always an arrow in our quiver and as we have a redevelopment site and one of our ecommerce clients was interested in that, we'd be more than happy to pursue that.

But I think the truth is most of those are just done with existing leases, existing product that’s in the marketplace.

Eric Frankel

Okay, thanks. Just a follow-up on that actually. Speaking of infill land sites, are there brownfield redevelopment opportunities that are available in the market today? I know you guys have taken that on in the last cycle in New Jersey and Baltimore. I wasn't sure if there was other large land sites that might be available this cycle, maybe the numbers penciled given where demand has been.

James Connor

We are, I would tell you that we probably have at any given time five or six of those in the hopper and there are all the Tier 1 industrial markets, New Jersey, South Florida, Chicago, Los Angeles.

And we’re working on some right now, I think you could expect some development activities it is centered around some Brownfield redevelopment that will get announced this year.

Eric Frankel

Good to know. Thank you very much.

Operator

The next question comes from the line of Manny Korchman, please go ahead.

Unidentified Analyst

Hey it’s Michael Bilerman with Manny. Just getting curiosity in how much time did you spend…

James Connor

Not a whole lot, given the size, location and the pricing, we just – it wasn’t really our deal, it really didn’t fit with us.

Unidentified Analyst

I mean out of those three variables what is the pricing that was the most limiting factor, look at the size of the transaction or was it just the assets side, I am just trying to understand sort of your approach to MOBs that you have been very successful developing but this businesses, this is a big piece of Duke, how you think strategically about either growing it more meaningfully outside of development or potentially selling or spending or merging it out if the pricing is quite rich for MOB. So I was trying to balance with those two variables.

James Connor

Well, I would tell you the size of the deal did bother us. We've done large deals before, never that large in the MOB sector, but we've done large deals like that in the industrial sector and as we continue to try and grow the business and create value that would not be in and of itself be a determent.

The pricing and the quality of the assets were really driver that kept us from pursuing the deal.

Unidentified Analyst

Now it is a pricing of that in terms of being very aggressive, give you any pause about strategically thinking about the MOB business as part of Duke or not?

James Connor

No it doesn’t give me pause, it reassures me that we're creating a lot of value for the shareholders with the development that we’re doing, just like we are on the industrial side.

So that said, we are very focused on exiting the office business and taking advantage of good pricing in that sector right now and we'll see what the future brings.

Unidentified Analyst

I'm curious in terms of the industrial landscape, over the last year you've had GLP consolidate a lot within US market, become the second largest owner of US product. You obviously had peeled the grow in buying KTR, and I'm curious whether you've noticed any change at all in the approach that the large owners, of which you are one of three, are doing in, at least on the public side, are having an impact at all in terms of whether it's pushing rents, whether it's development. You've had a lot of things happen.

James Connor

Well, I don’t think the landscape has shifted because the big guys have gotten bigger, because I think the ownership and development population in the US is still very, very fragmented. I think we’ve been able to push rents simply because of the strength of the marketplace. Not necessarily because we own more or PLV owns more, or GLP owns more, I think today the market fundamentals are very strong and that’s what enabled us to drive the business.

Unidentified Analyst

Thank you.

Operator

Next we will go to the line of Ki Bin Kim [SunTrust Robinson Humphrey] Please go ahead.

Ki Bin Kim

Thanks, just a quick one. When is the last time you guys went through an appraisal process for your land bank?

James Connor

A formal appraisal process?

Ki Bin Kim

No, it doesn't have to be formal, but trying to get a sense. Some of this is historical book site has to be written down. Trying to get a sense of what that market value would be.

James Connor

Well, I'll start Ki Bin. Once at least once a year we take a look at all the land we’ve identified for sale and write it down to lower phases of market. So I think we're very comfortable with all that land we've identified for sale, that it’s worth every bit of what we have on the book for, I guess in aggregate, maybe not a lot more, but it’s probably fairly close to fair value.

The development land that we got on our books of basis, somewhat we held for quite a few years and it’s - we have identified to develop because we really like it. So we do believe that there is - certainly if you mark that to market, you would market up probably 15% to 25% of what we have it on our books for.

Ki Bin Kim

No, it doesn't have to be formal, but trying to get a sense. Some of this is historical book site has to be written down. Trying to get a sense of what that market value would be.

James Connor

Ki Bin, I would speculate that it’s probably somewhere in the range of 50% and while on the surface that may seem a little low, I would remind you that all of our medical development is gone on land that is acquired specifically for that deal for the hospital or its hospital ground. So we have no inventory land for the medical business. So that piece of the development equation.

And again fundamentally we’ve changed a lot about how we do the business. We are no longer really interested in owning land that we have to carry for 10 years. So we are much more economical about what we buy and how quickly we put it in to production.

Ki Bin Kim

Okay. Thank you.

Operator

And at this time there is no further questions in queue.

Ronald Hubbard

Thank you, David. Thanks everyone for joining our call today. In addition we look forward to seeing many of you at our investor event at May 26 starting mid morning at the New York Stock Exchange, New York City. I will note that focus of the event is the unique opportunity to hear presentations from and to get to know our Executive Vice President leadership team that the engines out in the field that really continue to outperform and create value each and everyday for shareholders. Of course Mark and Jim will be there touching on how the execution of the regional levels has directly impacted our historical performance and briefly touching our broader strategy as well.

We encourage you to join us. For those of you that cannot make that event, we hope to see you at NAREIT in New York few weeks later. Thank you.

Operator

Ladies and gentlemen, it does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

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