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Executives

Ron Hubbard - Vice President, Investor Relations

Denny Oklak - Chairman and CEO

Jim Connor - Chief Operating Officer

Mark Denien - Chief Financial Officer

Analysts

Ki Bin Kim - SunTrust Robinson Humphrey

Jamie Feldman - Bank of America Merrill Lynch

Dave Rodgers - Robert W. Baird

Josh Attie - Citigroup

Brendan Maiorana - Wells Fargo

Paul Adornato - BMO Capital Markets

Eric Frankel - Green Street Advisors

Michael Salinsky - RBC Capital Markets

Duke Realty Corporation (DRE) Q4 2013 Results Earnings Call January 30, 2014 3:00 PM ET

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. You will have an opportunity to ask questions during the presentation. Instructions will be given then. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Ron Hubbard, Vice President of Investor Relations. Please go ahead.

Ron Hubbard

Thank you. Good afternoon, everyone. And welcome to our fourth quarter earnings call. Joining me today are Denny Oklak, Chairman and CEO; Jim Connor, Chief Operating Officer; 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, 2012 10-K that we have on file with the SEC.

Now for our prepared statement, I’ll turn it over to Denny Oklak.

Denny Oklak

Thank you, Ron, and good afternoon, everyone. Today I will highlight some of our key accomplishments during 2013, followed by our thoughts on the overall real estate operating environment and how it is affecting us. Jim Connor will then give you an update on our real estate operation, I’ll review our asset of repositioning activity and Mark will then address our fourth quarter and full year financial performance and progress on our capital strategy and then we’ll share details of our 2014 guidance.

Our solid operational performance, strong new development starts and achievement of the asset repositioning and capital goals we established back in 2009 resulted in an outstanding year for Duke Realty.

A few of the highlights for the year were as follows. We signed 30 million square feet of leases equal an all-time record and achieved a solid 70% tenant retention rate. We improved in-service occupancy to 94.2% and grew same property NOI 3.7%. We commence 666 million in new development starts, acquired over 540 million of industrial properties and completed nearly 930 million in dispositions.

We issued 500 million of unsecured debt at a weighted average yield interest rate of 3.8%, as well as executed $250 million term loan at a currently rate of about 1.5%. We redeemed $178 million of our 8.375% Series O Preferred Shares and we raised 669 million of common equity during the year which we used to fund our development pipeline and significantly improve our overall leverage profile.

The strong performance in 2013 accomplished the final leg of our strategic plan laid out to you over four years ago as follows. We achieved our asset repositioning to 60% industrial, 25% suburban office and 15% medical office on an NOI basis and today we have a best-in-class portfolio in each of our product types.

Over the last four years our team also executed flawlessly on the operational segment of the strategic plan, improving in-service occupancy over 800 basis points to over 94%, including the achievement of over 117 million square feet of total leasing activity since we embarked on the strategy.

We deposed of roughly $3.3 billion of non-core primarily suburban office properties and recycled $3 billion of capital into acquisitions of an extremely high quality portfolio of primarily bulk industrial facilities in key distribution markets around the country.

Also on the asset side, we started about $1.5 billion in new projects since 2009. Most important, the asset recycling has had a positive return for our shareholders in terms of AFFO, as we have grown our AFFO per share each year, again consistent with what we outlined over four years ago.

We also improved balance sheet metrics since 2009 with debt plus preferred EBITDA improved by roughly 80 basis point and fix charge coverage improved by nearly 50 basis points.

The score card in executing strategic plans speaks to itself. We have achieved the compounded average growth rate on AFFO per share of nearly 6% since 2010. This transforming -- transformative plan has been a success for our stakeholders and the company’s future opportunities and strategic direction are equally bright which we will touch on in a moment in connection with our 2014 expectations.

I will now discuss the overall market conditions we're experiencing and how this is affecting our business. Recent GDP reports indicate we are breaking out of the sub 2% to 2.5% growth we have experienced for the last two years with 2014 consensus GDP growth in the 3% range. This would be a nice boost to an already strong real estate fundamental picture across all of our product types and in most markets.

Starting on the industrial side, all leading indicators across trucking, rail, ISM, retail sales, e-commerce have continued to show growth which bodes well for strong leasing fundamentals and development opportunities.

Preliminary fourth quarter market reports depict one of the best quarters on record with nearly 45 million square feet of net absorption. This is a level not seen since 2007 and contribute significant 40 basis point drop in the national industrial vacancy rates during the quarter to an overall mid to high 7% range according to a number of sources.

The PPR54 Index also reported market rent growth for the fourth quarter up nearly 4% on a year-over-year basis. These positive statistics are not surprising to us and there are representative of the positive results were experienced in our portfolio.

With respect to leasing in our in-service portfolio, all the five of our 22 industrial markets are over 90% leased and 15 or over 95% lease with an overall occupancy level of 95.3%. We finish with strongest quarter of industrial leasing in history of the company, with total leasing of 10.1 million square feet nearly 3 million square feet above the previous record.

Rents on the industrial renewal leases grew nearly 5% for the quarter and nearly 4.5% for the full year and with continued strong demand for modern space and moderate supply, we are optimistic about improving rent growth picture for 2014.

As noted last quarter, we believe we have additional upside in overall industrial occupancy and coupled with contractual rent escalations and improving rent growth supports a very solid same property growth outlook that Mark will discuss in a moment.

The medical office business continues to benefit ongoing legislative changes in the industry, hospital consolidation is happening at a strong pace and physician practices are being sold to major hospital systems.

Even with trepidations on the launch of the Affordable Care Act health systems continued to have aggressive plans to invest in modern outpatient facilities. This is driving strong demand in our medical office business.

In 2013, we started nearly 180 million of healthcare development projects with a lease term yield averaging above 8.7% and our premium MOB development franchise has a strong backlog of potential projects we are working on now. Overall, the medical office business has tremendous growth prospects.

Finally, the suburban office sector has continued to show more positive trends. Although, the national vacancies are still in the mid teens, net absorption stayed positive for the 15th consecutive quarter.

We see continued strength in our portfolio and in the context of our active disposition program, our quarterly average same property occupancy is up 240 basis points over last year.

I'm pleased to announce that four of our eight markets, Raleigh, South Florida, Indianapolis and Nashville have achieved occupancies in the 92% to 95% range. Regarding office land positions over the last two years we've had outstanding success at winning corporate build to suite deals and also commencing substantially pre-leased or speculative development opportunities in select market such as Houston and Raleigh monetizing much of this land. These opportunistic office developments have produced very strong 9% to 10% stabilized yields representing excellent value creation for our share.

So now I will turn it over to Jim Connor to give a little more color on our leasing activity and the development pipeline.

Jim Connor

Thanks, Denny. Good afternoon, everyone. As Denny mentioned, we had a record fourth quarter in leasing. We did over 11 million square feet of leasing. We also commenced a record 362 million square feet of new development starts.

I will start with the leasing side, our overall in-service occupancy increased 70 basis points from last quarter to 92 -- 94.2%. Leasing activity on the industrial side was terrific. We signed a record 10.1 million square feet of leases during the quarter and increased our industrial in-service occupancy from 94.6% at the end of the third quarter to 95.3% at year end.

I’ll hit some of the highlights around the local markets starting with Indianapolis. We are seeing significant increase in customer demand in both the northwest and the airport submarkets. We signed a 312,000 square foot new lease and 270,000 square foot renewal with a major tenant in park 100 Business Park. We signed the 343,000 square foot new lease at our recently delivered and some spec project which brings that to 60% leased.

In Indianapolis, we also executed an 800,000 foot renewal combined with a 200,000 square foot expansion for client of ours had shared books in our Lebanon Business Park. Couple of other notable deals around the system and new lease for 240,000 square feet with Amazon, they took 100% of our Houston spec/industrial project.

We also signed a 320,000 square foot new lease with Rock Tenn in our World Park 3 project in Cincinnati. There are also quite a few new leases signed in connection with build-to-suit developments which I'll touch on in just a moment.

Turning to the office side. Our overall in-service occupancy in the office portfolio at quarter end was 87.8%, that’s up 60 basis points from the previous quarter and up 150 basis points over the prior year. Overall leasing activity for 2013 was strong at 4.5 million square feet signed and over 1 million square feet increase from 2012 and this was accomplished with a 60% smaller portfolio, I might add.

For the fourth quarter, we signed over 800,000 square feet of deals including a few notable ones in Cincinnati and 81,000 square foot lease on 11-year term for HSS Systems and 59,000 square foot renewal for FRCH worldwide for the seven-year term.

Turning to the medical side, our medical office portfolio continues to produce very strong results with over 925,000 square feet of leases signed during the year. We ended the year with occupancy at 93.7%. That’s 230 basis point improvement over year end 2012.

Now I’ll turn to the development business. In 2013, we started 26 new projects totaling $660 million -- excuse me $666 million in projected stabilized cost. That’s an excellent year and exceeded even our expectations going in from the beginning of the year. For the fourth quarter, we started 362 million of primarily industrial build-to-suits as well as three medical office projects, totaling 4.3 million square feet with a weighted average gap yield of 8%.

Early in the quarter, we broke ground on a 1 million square foot build-to-suit for Amazon at Chesapeake Commerce Center at the port of Baltimore. This is a deal we mentioned on our last call. We also started two build-to-suit projects in our joint venture, AllPoints Midwest in Indianapolis. One transaction was 1.1 million square feet, the other was 614,000 square feet both with major national retailers.

In Atlanta, we started two build-to-suit facilities totaling 480,000 square feet, one for HH Gregg appliances and the other for Federal Express. Our final industrial build-to-suit was of 300,000 square foot distribution facility in our Gateway North park in Minneapolis for Ruan Transportation.

In addition to the industrial build-to-suits, we started one industrial speculative project in our Linden, New Jersey that’s a Brownfield redevelopment site, just south of Newark International Airport. We monetized 24 acres of land that we had just acquired out of joint venture that we had a 50% interest in. That will support that 494,000 square foot modern bulk facility and just a couple of comments about that market. This is a submarket. The total is about 45 million square feet with vacancies under 9%.

Finally, we started three medical office projects totaling 197,000 square feet. Two of these projects were with existing hospital system relationships we have with Ascension and Centerre. The third was a new relationship in New Jersey with Palisades Medical Group.

These facilities are located in Indiana, Tennessee and New Jersey, respectively. Three projects are 79% pre-leased with terms -- with lease terms ranging from 7 to 15 years. Including this very strong fourth quarter activity, our development pipeline at year end is over $610 million with a weighted average stabilized initial cash yield of 7.7% and a gap yield of 8.4% and is 89% pre-leased in the aggregate.

This development pipeline is one of the key value creation drivers for us at this point in the economic cycle with development spread approximating 150 to 200 basis points above market cap rates. This is an excellent investment focus and with such high pre-leased percentage, the news lease revenue is immediately accretive when the building is complete and put in service.

Just a quick note on the supply outlook for the industrial sector. Spec projects in our markets for the -- totaling for the fourth quarter of 2013 ended the year at just under 53 million square feet. This is an 11 million square foot increase over the third quarter of 2013. However, during that same period of time leasing increased 3.2 million square feet at year end.

We saw the percentage of leased -- the percentage leased of this spec inventory increased by just under 8% to 22.21% overall. In this context that we've alluded to on the previous earning calls, we think supplies has relatively disciplined and essentially in all of these markets in this cycle compared to historical levels. We’re monitoring this activity closely but feel comfortable right now.

Given our entitled land positions which can support approximately 50 million square feet of bulk industrial development and given our relationships and track records at winning major build-to-suits with top customers, our development platform is in a dominant position to drive strong risk-adjusted growth through the cycle.

I'll now turn it back over to Denny to talk a little bit about our asset recycling activities.

Denny Oklak

Thanks Jim. During the fourth quarter, we acquired two industrial facilities totaling nearly 1.2 million square feet or $73 million, bringing the total executed acquisitions to $545 million for the year.

On the disposition side, proceeds from asset and land sales for the fourth quarter were $412 million and $19 million respectively. For the full year, proceeds from asset and land sales were $877 million and $52 million respectively.

With this activity, we ended the year at 60% industrial, 25% office and 15% medical, hitting our four year strategic goal. In comparison, looking back four years ago, we had 56% office and 36% industrial. And I’ll emphasize today we’re much geographically better positioned and the quality of our portfolio is top tier.

Regarding the acquisitions for the quarter, we bought only two assets. Both were industrial assets, one in Chicago and one in Miami that we bought from users in sale leaseback transactions. These properties require below-market valuations with leases that have solid annual rent escalations that will produce future same property growth.

Turning to disposition transactions. During the quarter, we closed on a series of transactions encompassing 11 suburban office assets and 15 medical office facility deals which we've been discussing with you since mid-2013. Our ownership share of the suburban office disposition represented about 1.5 million square feet and totaled $192 million in aggregate sales price whereas the medical portfolio encompassed about 750,000 square feet and totaled $210 million in aggregate sales price.

Both the medical office and Midwest suburban office dispositions that closed in the fourth quarter represent most of the disposition pipeline we set out to sell last year. For various reasons, a few of these transactions are spilling over into 2014 as we expected. About 60 million of which have already closed so far in January. In addition, there are number of disposition transactions in process, which means we should get off to a strong start in 2014.

Finally, regarding the land sales component of our dispositions, for the quarter we sold $19 million and for the year we sold $52 million achieving the top end of our expectations and realizing about 20% gain to our book basis. Coupled with development starts, the aggregate amount of land monetized in 2013 was $114 million.

So now I'll turn the call over to Mark to discuss the financial results, capital plan and our 2014 plan.

Mark Denien

Thanks Denny. Good afternoon everyone. As Denny mentioned, I’d like to recap our 2013 financial performance and progress on our capital strategy. I'm pleased to report that core FFO for the quarter was $0.29 per share, up from $0.28 per share in the third quarter.

The improvement in Core FFO for the quarter was driven by continued stronger operational performance as evidence by increased occupancy and same property results, as well as due to the earnings from new development projects that were placed in service.

We reported core FFO of $1.10 per share for the full year compared to a $1.2 per share for 2012. We’re extremely pleased to report AFFO of $0.90 per share for the full year and $0.21 per share for the fourth quarter of ‘13. AFFO per share for the full year represents a nearly 10% improvement over 2012 results and translates into a very conservative payout ratio of slightly below 76%.

In addition, the increased earnings is reflected within core FFO, the growth in AFFO over 2012 was the result of our asset repositioning efforts as our concentration in less capital intensive bulk industrial assets have steadily increased over the last two years.

Our same property growth was strong for the year and reached the top end of our expectations. Same property NOI for the 3 and 12 months ended December 31 was a positive 2.3% and positive 3.7%, respectively. Continued occupancy increases, contractual rent escalations and improving rental rate growth on expirations drove the solid performance. Our growth from net effective rent on renewals was 5.1% for the fourth quarter and 3.1% for the full year, driven in large part due to the rental growth across all product types.

We expect this trend to continue as rental rates continue to grow in all product types in our markets. I would also like to remind everyone that the occupancy percentages we quote are on a lease signed basis. This means that not all of this increase leasing activity has actually commenced and started paying rent. So we have some cash flow upsides here in addition to further leasing that we can do. In summary, our operational performance continued to improve over the last year, and we expect continued solid operating fundamentals moving into 2014.

Now, I will quickly recap capital transactions for the quarter and for the full year. As previously announced in December, we refinanced $250 million of unsecured bonds which had a stated rate of 5.4%, and an effective rate of 6.3% with a new 3.875%, $250 million issuance that’s due in 2021. This seven plus year issuance fits well within our future maturities and essentially covers us on all debt maturities until 2015.

Including this transaction, we issued $750 million of unsecured debt during the full year of ’13, of which $500 million is fixed in an average effective interest rate of 3.8%, and $250 million represents a five-year term loan that bears interest at LIBOR plus 1.35%. During 2013, we repaid $675 million of higher rate unsecured bonds, which had an effective interest rate of 6.4%. We also repaid 12 secured loans, totaling $154 million, which had a weighted average effective rate of 5.5%.

Looking back to February of 2013, we redeemed $178 million of 8.375% Series O Preferred Shares, which resulted in a $3.7 million quarterly reduction of preferred dividends. Following our $41.4 million share equity offering that raised $572 million in January of ‘13, we opportunistically used our ATM program, issuing 4.8 million shares of common stock at an average price of $16.67 per share, which generated net proceeds of approximately $78 million for the year.

We all see building and land disposition proceeds as an additional source of funding for a new development. Proceeds from dispositions including our share of joint venture sells, totaled $431 million for the quarter and $929 million for the year. We expect a strong pace of disposition activity to continue in 2014, which will allow us to fund our development pipeline, while still improving upon our key leverage metrics.

We ended the year with $88 million outstanding on the line of credit. We expect to pay this line down further in 2014, using the proceeds from near-term dispositions. We have no individual debt maturities of any significance until February of 2015. We also achieved improvements in our key leverage metrics during the fourth quarter, reporting

a fixed charge coverage ratio of 2.1 times for the rolling 12-months ended 12/31/13, compared to 2.0 times for the rolling 12-months ended September 30th of 2013.

Fixed charge coverage for just the fourth quarter was 2.3 times, demonstrating our continued improving leverage profile. Net debt plus preferred to EBITDA after pro forma adjustments for dispositions, acquisitions and the impact of our development pipeline was 7.7 times for the fourth quarter of 2013.

Reduced leverage improved operational performance and the impact of development deliveries drove this result, which is favorable compared to net debt plus preferred to EBITDA of 8.9 times back in the fourth quarter of 2012. These improvements to our key leverage metrics, as I’ve said in the last couple of quarters are partially due to completing development projects where we’ve incurred significant costs without realizing the earnings.

Because of our development projects under construction are currently 89% pre-leased in the aggregate, we will continued to realize improvements to our key credit metrics as projects continue to come online. With no debt maturities of any significance in 2014, our much improved balance sheet, anticipated disposition proceeds and virtually untapped line of credit, we are well-positioned for future growth heading into 2014.

Now, turning to our 2014 outlook, yesterday, we announced a range for 2014 FFO per share of $1.11 to $1.19, with a midpoint of a $1.15 per share and AFFO per share of $0.91 to $0.97 with a midpoint of $0.94 per share. This guidance supports what we've been saying for the past four years that our asset repositioning strategy would not be dilutive on a cash flow basis, and would ultimately put the company on an upward plain of growth, which is now occurring.

First, from a macro outlook perspective, we expect a slightly improved economic environment in 2014 and continued solid real estate fundamentals, which are reflected in our guidance. A few specifics on some of the anticipated key performance metrics outlined on the 2014 range of estimates page provided on our website are as follows.

Our average in-service portfolio occupancy range for 2014 is expected to be 93.25% to 94.75%. The midpoint of which would be about 70 basis points better than our average 2013 numbers. Lease expirations are slightly below average at 8%. Same-property NOI is projected to grow at a range of 2.0% to 4.0%. As noted, we expect some incremental occupancy growth as well as continued improvement in rental rates.

On the capital recycling front, we project proceeds from building dispositions in the range of $500 million to $700 million, and proceeds from land dispositions of $30 million to $50 million. This range is inclusive of the dispositions that are currently in process that Denny mentioned earlier. Our disposition program will continue to focus on primarily suburban office and our remaining few retail properties.

Acquisitions are projected in the range of $150 million to $300 million. We expect to be pretty selective given today’s pricing environment and still focused on high-quality industrial assets that are strategic and accretive to cash flow. Development starts are projected in the range of $350 million to $450 million, a level that was partially impacted downward by the strong fourth quarter 2013 deals that got signed a little bit earlier than we expected. These will be primarily industrial and medical office projects, and we expect to fund our development pipeline primarily with proceeds from our building and land dispositions.

Service operations should be in the range of $16 million to $22 million, consistent with our fourth quarter 2013 run rate, and G&A expense is expected to be in a range of $40 million to $44 million as we continue to realize operational efficiencies. We close the year with fantastic performance and executed our strategic plan as outlined over four years ago.

To reiterate these 2013 highlights, we grew AFFO per share by nearly 10%. We grew FFO per share by nearly 8%. Our leasing team executed 30 million square feet of leased transactions and we experienced improving rental rate growth throughout the year and ended with 5% growth on renewal rents in the fourth quarter.

We started $666 million in new developments, and in the process monetized $62 million of land. Our $611 million development pipeline is 89% pre-leased. We sold $52 million of land at a $10 million gain. We significantly improved our leverage profile. We accomplished our asset target goals. All of these accomplishments have positioned the company for continued growth as we head into 2014 and beyond.

With that I will turn it over to Denny.

Denny Oklak

Thanks, Mark. I would just like to thank the entire Duke Realty team for their efforts. They were instrumental in helping us achieve the asset repositioning capital strategy goals that we’ve laid out four years ago. It's pretty amazing when you look at the volume of transactions it took to accomplish these goals.

From an asset repositioning perspective over this four year period, we’ve closed on average one transaction every eight business days. From a capital strategy perspective over this four year period, we raised on average $6 million every business day, pretty impressive work.

In closing, we have a premium franchise real estate company made better by our strategic efforts over the past few years and we are poised to drive strong and steady investment returns and create long-term value for our shareholders.

So with that, thank you again for your support in 2013 and for joining us today. And with that, we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ki Bin Kim. Please go ahead.

Ki Bin Kim - SunTrust Robinson Humphrey

Thanks. I just had a couple of questions regarding your 2014 guidance -- FFO guidance. If I exclude -- when I look at it, it says unexpected dispositions of about $600 million. It will probably add about roughly $0.05 to your FFO guidance. It seems high. I’m sure there is some other moving parts to this. I was wondering if could provide a little more clarity, especially touch on -- are you capitalizing more G&A and perhaps talk a little bit more about the timing of dispositions and development completions throughout the year?

Mark Denien

Ki Bin, I’ll try to address some of that, I don't know the math behind your $0.05 but a couple of things. Our overhead overall is pretty flat. I would say in 2014 versus ’13, we do expect to be a little bit more efficient, have a little more volumes. So we probably had -- we will have a little bit more G&A capitalized but should not be significant. That’s why our G&A numbers are pretty flat from ’13 to ’14 in our guidance.

From development and acquisition and disposition timing perspective, the way we really looked at it is we really wanted to able to support our development pipeline through being a net disposal of properties. So as far as timing, I would tell the timing in the yields, the yields on development projects should be higher than the yield or the cap rate on the dispositions.

So that would be a pickup, although the development deliveries probably be a little bit backend loaded compared to dispositions. So, overall, those should probably pretty much washout.

I’m not sure how you’re getting your $0.05 maybe we can talk about that offline and go through that. But that’s a little bit around the timing and yields. So I think, we’re pretty bullish that our yields underdevelopment, it’s going to exceed the dispositions and then in that like I said we’ll fund that development pipeline through our disposition program and that’s why you see our disposition number where they are.

Denny Oklak

Yeah. Just a couple points on that, I think, as I mentioned in the remarks Ki Bin, I think with the closing that carried over into the early this year along with the pipeline, we’ll probably get off to a fairly fast start on the dispositions for the year hopefully.

And then second, even though if you look at starts from year-to-year and starts in 2013 on the development side were up some, overall volume is not of as much as the start comparison. So really, when you look at overall development volume, it’s going to be up a little bit in 2014, but right now based on our guidance since not up to that significantly from where we were in 2013.

Mark Denien

Yeah. That’s a good point and if you look in our supplement, I don’t have the page in front of me, Ki Bin, but if you look at the first and second quarter deliveries of our development pipeline, its mainly office and MOB projects. So that's what will bring our development pipeline down a little bit quicker and have the overall volume in ’14 fairly close to ’13.

Ki Bin Kim - SunTrust Robinson Humphrey

And so maybe just as a follow-up, what cap ratio we expect on average for your dispositions in 2014. And what dollar volume of completion should we expect?

Mark Denien

I am sorry, the dollar volume of…

Ki Bin Kim - SunTrust Robinson Humphrey

Development completions.

Mark Denien

Development completions, so I think its really going to vary on the mix of our products that we sell on the cap rates. Again it’s primarily the suburban office assets and couple of retail projects that will likely sell the last little bit of retail we have.

So, I don't even really feel comfortable necessarily giving you cap rate guidance today. But I think, if you look historically its going to fall in the range that you've seen over the last year or so, 18 months on our dispositions, I don't see any change there.

Ki Bin Kim - SunTrust Robinson Humphrey

Okay. Thank you, guys.

Mark Denien

Thanks Ki Bin.

Operator

All right. Our next question comes from the line of Jamie Feldman. Please go ahead.

Jamie Feldman - Bank of America Merrill Lynch

Hey. Thank you. So, are there any, Mark, I know you guys said you think supply in the warehouse side is pretty much in check. Are there any market or submarkets where you are feeling a little bit more concerned?

Denny Oklak

Well, Jamie, I would tell you that that most of us use the metric in terms of the amount of spec space, that's in the pipeline as a percentage of the overall portfolio and everybody tends to feel pretty comfortable at 1% or below.

There’s really only a couple of markets nationally that are above that. Phoenix and Seattle are the only two and they’re slightly above and between the third and the fourth quarter, we didn’t track any additional new spec developments announced or started and they both made some improvement in their leasing. So, they are improving on it, so there is none that really worry us right now.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And then, I guess, turning to office. Can you just give a little more color about where you think we are in the cycle and maybe just some anecdotal evidence of what you're seeing in the market in terms of maybe its spreading to new market, is it new types of tenants. Just try to dig a little deeper, given you have such a wide breathe of markets, kind of how people should be thinking about where we are in the cycle and where it goes from here?

Denny Oklak

Well, I would tell you the, our year end results are fairly consistent with what we saw through the third quarter and we talk a little bit about on the third quarter call and that many of the conferences when we saw each other. You’re seeing financial services companies, healthcare companies, healthcare service companies, a lot of retailers and food companies are the drivers behind a lot of the growth and the job, the hiring that we’re seeing. It’s a -- we’re seeing it across the country. We gave a couple of highlights of some very nice deals. But lot of that growth was made up of small and mid-size deals that are growing and expanding as well.

Jamie Feldman - Bank of America Merrill Lynch

Okay. And I apologies if I miss this, but did you say for your same-store outlook. What it will be for office versus industrial?

Denny Oklak

No. We didn’t, Jamie, we just commented overall that it’s going to be a net 2% to 4% range. But I would tell you that it probably won't be a lot different because we’ve got, while the occupancy growth on the industrial side is slowing. We’re making that up in rental rate growth. You have the inverse on the office side. We still have quite a bit of occupancy growth. We can get on the occupancy side even though the rental rate side challenging. So I think that they should be really pretty close.

Jamie Feldman - Bank of America Merrill Lynch

Okay. Great. Thank you.

Operator

The next question comes from the line of Dave Rodgers. Please go ahead.

Dave Rodgers - Robert W. Baird

Hey. Good afternoon, guys. Maybe for Jim or for Denny on the industrial side, demand clearly pretty strong to end the year, I'll be curious on your thoughts and how it’s moving into 2014. The demand that you're seeing in January and maybe kind of the mix between build to suit activity and spec activity and development for industrial and whether you're getting more confident to put more spec out there over the course of this year.

Denny Oklak

Jim?

Jim Connor

Well, I would tell you, obviously, we had a very strong finish and we’re kind of expecting a fairly significant falloff right after the holidays given everything we accomplished.

But I would tell you that through the first four weeks of the year, we’re still very optimistic. We've seen continued increase about demand, deals that are in process are continuing to track. So, I think, we feel pretty optimistic about the outlook for momentum in 2014.

In terms of development versus spec, we’ve answered a lot of questions about that recently. We’ve always concluded, as long as we can continue to meet our development budgets doing really good build to suit development deals with credit tenants with good terms and good yields.

We’re going to keep the governor on the spec development. We don't need to take that much additional risk. We’re still getting great yields on the build to suit portfolios that we’ve reported. Its much more creative for us as this portfolio is 89% pre-released, as soon as it comes in service we start adding value. So in short, we’ll continue to pick and choose the places to do some spec development, but I don't think you'll see us significantly ramping up spec activity.

I think it will be consistent with 2013 because we feel pretty strong that our build to suit activity will remain constant. And we’re still see it, even though we signed a bunch of deals in the fourth quarter. We’ve still got new opportunities that have come about since, since the holidays and the pipeline was pretty good going into the holiday. So I think we’ll remain consistent on that on the front.

Dave Rodgers - Robert W. Baird

And then Mark, maybe with regard to guidance, two things, does the guidance or have you contemplated I guess and talk about preferred redemption this year, what’s callable out there and any land sale gains that you included in the guidance itself?

Mark Denien

Yeah. Dave, I’ll start with the land. We don't include land gains in our core AFFO and our guidance was on core AFFO. So, I would tell you that the margins we experienced on a land sale gains in ’13 is probably what we would expect going into ’14 but we don't include that in our guidance. Then from -- I’m sorry what was the first question, Dave?

Dave Rodgers - Robert W. Baird

Preferred redemption.

Mark Denien

Well, preferred redemptions, yeah, we always looking at that. We know it’s out there and it’s fairly costly, but at the same time it’s a source of capital that we don't have to redeem. I think a lot of that would come down to what are our other opportunities. And right now being a net disposer of call it $500 million give or take, $500 million development pipeline, that’s the good way to fund that in the short-term.

Denny Oklak

Yeah. I guess, Dave, just to be clear. Our guidance does not include any preferred redemptions.

Mark Denien

Yeah. It does not include that, correct.

Dave Rodgers - Robert W. Baird

Okay. Great. Thank you.

Operator

All right. The next question comes from the line of Josh Attie. Please go ahead.

Josh Attie - Citigroup

Thanks. Good afternoon. Just going back to the question on guidance, it seems like more details and kind of asset sales and capitalized interest assumptions could be helpful. Can you tell us at the mid-point of guidance, what are you assuming for capitalized interest and how does this compared to the 2013 number?

Mark Denien

Yeah. Josh, I mean, it’s maybe just a tip higher than 2013 but less than a penny. Like Denny said, our overall development pipeline on average in 14 is going to be about same levels of 13, because all these starts we started late in ‘13 our industrial project, you turn a lot quicker, the bill times a lot quicker than the office name will be. So we have a higher development pipeline going into 2014 than when we likely will come in out of ‘14. So on average it’s not a big difference.

Josh Attie - Citigroup

And also on capitalized G&A?

Mark Denien

Capitalized G&A, I mean, you could probably look at it like this. Our overhead assumptions are pretty flat from ‘13 to ‘14 and our G&A guidance is, well, if I remember, our midpoint maybe down a million or two, so that’s probably the difference in capitalized G&A give or take.

Denny Oklak

Yeah. I guess, I would add on the capitalization side, especially when you have a very highly pre-leased development portfolio, the capitalization is really at a very low, low end because you don’t capitalize anything once the building, the shell building is down and goes in service. So I think our capitalization numbers are probably, as well as, they would be in our history is with this type of development pipeline.

Mark Denien

Yeah. That’s right.

Denny Oklak

And then…

Josh Attie - Citigroup

And so.

Denny Oklak

The other question was on disposition timing, is that correct.

Josh Attie - Citigroup

Yeah. Maybe if you could just, it sounds like capitalized G&A and capitalized interest are maybe a little bit of benefit in 2014, but not a large benefit that’s the right way to think about it?

Mark Denien

Yeah. Definitely.

D

Absolutely.

Josh Attie - Citigroup

Okay. And then on asset sales, at the midpoint of, can you just tell us kind of that the midpoint of guidance, what are you assuming for timing, does the midpoint of guidance assume that they close midyear, the midpoint assume back half of the year, first half of the year?

Denny Oklak

I guess, what I would say is, it's probably weighted slightly to maybe the first four months of the year. In other words maybe first four months of the year includes 35% to 40% of the dispositions roughly because, I think, we’ve got a couple bigger ones that are carrying over potentially plus might that we would be marketing earlier. But again it’s -- there isn’t any big lump in it, I guess, Josh, it’s fairly evenly spread throughout the year.

Josh Attie - Citigroup

And the cap rate that we should think about the average cap rate.

Denny Oklak

Well, again, I hate throwing this out because the mix of these things very so much, but like, I suppose you guys aren’t going to quit until I took that kind of number out there. So, again, its primarily suburban office properties in various geographical locations, various quality, I think if we put out in place cap rate on NOI and probably the 7.5% to 8% range is probably about where we are and we -- than we think that definitely make sense when you look at this specific assets that we’re looking at so on this year.

Josh Attie - Citigroup

Okay. Thanks. That’s helpful. And then, I heard your remarks said, the increased development spending this year will be funded mainly through asset sales, which implies that you won't need any new equity to fund your growth. But you also highlighted in the press release and on call that you are very happy with kind of where your debt-to-EBITA and your fixed charge coverage ratios are kind of shaking out? And I guess, I just want to ask, to the extent that there was timing lags between asset sales and when some development comes online, are you comfortable with some of those metrics moving around a bit and your comfortable funding the pipeline entirely with asset sales and not raising new equity.

Mark Denien

Yeah. Josh, I think we are and like Denny said, there will be some timing differences. But I think it will probably work in our favor from the balance sheet perspective because like Denny mentioned, probably a little bit more front-end loaded on the dispositions and a little bit more backend loaded on the deliveries and the spend.

So, like I say, keep in mind, a lot of the deliveries that are going to hit us in Q1 and Q2 is already on our balance sheet from the debt perspective. So we immediately get the EBITDA today goes in service, I think that’s disconnect.

Josh Attie - Citigroup

Okay. It sound like.

Mark Denien

And there could be some timing, you are right, but I don't think it's going to be a negative.

Josh Attie - Citigroup

Okay.

Denny Oklak

Well -- the significant, I mean when you are, with the size of company that we have just the timing of building and putting in service and selling and paying down just doesn't have that significant effect on those measure ratios.

Josh Attie - Citigroup

Okay. So it sounds like where the balance sheet is today and kind of what your growth plans are that you don't need new equity if for 2014 to fund what you want to do?

Denny Oklak

That’s correct.

Josh Attie - Citigroup

Okay. Thank you.

Operator

Next question comes from the line of Brendan Maiorana. Please go ahead. Your line is open.

Brendan Maiorana - Wells Fargo

Thanks. Good afternoon. Mark, the same store NOI growth guidance that you gave. Just -- I’m sorry, is that cash gap or is that two to four is that for both?

Mark Denien

That’s cash Brendan. We don’t -- we’ve not disclosed GAAP.

Brendan Maiorana - Wells Fargo

Okay.

Mark Denien

We’re probably not a lot different but it is a cash number.

Brendan Maiorana - Wells Fargo

So just kind of Big picture I guess I look at it, you’ve got 70 basis points of occupancy growth that's probably about 100 basis point of same store NOI, kind of year-over-year but at the midpoint, the remaining 200 basis point is that, kind of just in place bumps and maybe a little bit of positive spread?

Mark Denien

Yes, both. Hopefully it’s more than a little bit of positive spread.

Brendan Maiorana - Wells Fargo

Okay. Okay -- that’s help. So I guess the bigger question is do you think given that your occupancy is now at what I would characterizes is pretty stabilized levels. Do you do think two to four is sustainable beyond 2014. That’s a reasonable run rate or do you feel like that’s a little bit higher than average because you’ve got a little bit of occupancy pickup this year?

Mark Denien

No, I think its sustainable specially on the cash basis, Brendan, I mean one of big differences at least in our industrial portfolio from say five years ago is the fact that we now over the last two to three years have really done good job of building in 2% to 2.5% ramp up and all the deals that we have, which was really not terrified 5 to 6 years ago. So as we continue to build those bumps in on top of the going in increase sale on. And I think it is a sustainable number.

Brendan Maiorana - Wells Fargo

Okay, okay that’s helpful.

Jim Connor

Brendan.

Brendan Maiorana - Wells Fargo

Yeah go ahead.

Jim Connor

Add one thing to that because even on occupancy, we think we’ve got a little bit more in the industrial. You have typically the bulk portfolio. When the market start, we can run it 96 you know maybe a little bit about that and we’re just below that now. But also I think you can’t forget about our -- it's driven office portfolio. Even though, we’ve had some nice improvement over the last 12 to 18 months that’s still below 88% leased.

And again that portfolio we typically run in the low -- at least in the low 90s. And so I think we’ve definitely got some -- some occupancy growth in that suburban office portfolio hopefully as we, look out over the next 12 to 24 months.

Brendan Maiorana - Wells Fargo

Yeah. Okay now that’s helpful and Denny on that, it sounds like if you do $500 million to $700 million of disposition. There is probably, if I look at your retail portfolio, I don’t know exactly what it's worth let say 150 to 200. So you probably have somewhere around $400 million to $500 million of disposition on suburban office in the plan for ‘14. Given that you reduced to that percentage down to 25% of your total. What’s kind of left in and is it geographic regions that are just picking off some of the non-core stuff and then how should we think about the suburban office portfolio over the next several years. So they continued to get little down even after 14.

Denny Oklak

Well I guess lets start up with what we have left and I’ll make some comments and Jim can chime in on what I’m not thinking. But it’s oppose the Blackstone sales that we’ve completed now about two to three years ago. You’ve got -- we exited completely and most a number of market. So the suburban office portfolio is really concentrated in just a few markets today. And give you the major ones, it would be South Florida, Raleigh, Indianapolis and Cincinnati, St. Louis and DC. But DC is mostly joint venture.

So that’s not significant and a little bit national. So those -- my office -- our office portfolio investments is concentrated in those markets. Quite obviously those markets are all doing very well. As I mentioned, I think in the remarks four of those markets are we’re in the 92% to 95% lease range.

Activity is strong in several of those markets. Aand yeah I think what you'll see, there's there are some, I’ll call maybe larger non-strategic assets in that portfolio that we look to down size similar to what we did last year when we sold Cap Trust in Raleigh. We still -- I think there’s some additional assets we looked through in a couple of the Midwest markets like Cincinnati and St. Louis.

So -- but then as you know, we started two nice development projects in Raleigh last year and we started one on some land in Dallas. So I think what you'll see is to continue including that portfolio. Generally speaking again I think cap rates are going to be better, be lower on the stuff that we sell, go forward and some one to stop we sold over the last two to fours years. And I think you’ll see us do selected developments on some of that land we own. So trending down probably in the overall percentage, but I wouldn't sit here and say there is any major moves from like 25 to 15 or anything like that.

Brendan Maiorana - Wells Fargo

Okay. That's helpful. I got two more quick ones if I can. Mark, you guys mentioned that you monetized $66 million of land in the quarter, but it looked like your land balance went up by $10 million or so. I know you took on the stuff in New Jersey. I think that was maybe around $30 million or so, but what makes up the difference and why did the land balance go up?

Mark Denien

Yeah. So we did take on the joint venture land and the way you got to look it at because it came on our balance sheet and we brought out our partner. The whole amount came on the balance sheet and moved. I think the $66 million, Brendan, was for the full year, not the quarter of the land for development that was monetized. We did have a total of $110 million of reductions in land, $60 some million went into development, we sold $50 million.

Earlier in the third quarter, we had acquired some land in Houston to do a development project, so we immediately took down. So you can't look at the balance sheet from 12/31/12 to 12/31/13 and see the $110 million coming out, because we did actually acquire some land on top of that.

Brendan Maiorana - Wells Fargo

Okay. That's helpful. Let’s give it at 100% on the JV I didn’t calculate that in. Last question, you guys done a nice job growing the AFFO. You've also done a nice job bringing your leverage where it needs to be. Your payout ratio now on the dividend is pretty low relatively to where your AFFO is. When do you revisit the dividend level?

Denny Oklak

Well, I think we’ve been watching it. I think you'll probably see us going forward and we’ve been very conservative on the dividend payout ratio. We spent too many years during the downturn with that percentage be in over a 100 to ever want to go back there again. And so we've really been pretty conservative on rate raising the dividend.

But clearly, I think now with the repositioning substantially done with business getting better with our ability to grow the company through the new development process again on and monetizing this land by putting it into service. I think that's clearly something we'll continue to monitor on a very regular basis as to whether we want to look at increasing it.

Brendan Maiorana - Wells Fargo

Okay. All right. Thank you.

Operator

The next question comes from the line of Paul Adornato. Please go ahead.

Paul Adornato - BMO Capital Markets

Thanks. Good afternoon. Jim, I think you mentioned that build-to-suit industrial developments, we are getting a 150 basis points spread over acquisition cap rates. I was wondering, what that spread has been historically for you guys?

Denny Oklak

You mean by historically like?

Paul Adornato - BMO Capital Markets

Like over the last

Denny Oklak

20 years?

Paul Adornato - BMO Capital Markets

Yes, yes.

Denny Oklak

Well, I would tell you that it's probably been thinner. But that was as a result of a lot more spec space in the market. I think we could all remember back in the mid-2000s, when there was a lot more spec space available and that was putting some pressure on pricing, which was affecting the yields. But as we said earlier and we talked about some of the numbers, we feel very comfortable that these markets are in balance.

So we're not seeing that same pricing pressure. And a lot of the deals that we're doing, a lot of these big deals, there isn’t spec space available. I mean, you look at the 500,000 plus deals, you can’t go to a lot of markets and find spec space available. So a lot of our corporate institutional clients are forced to turn to build-to-suits and that's obviously a good thing for us.

Paul Adornato - BMO Capital Markets

Okay. And so to kind of further that thought, if the build-to-suit spreads are healthy for you guys and then presumably for others, why isn't there more development capital going to build-to-suits in the market that is?

Denny Oklak

Well, because we're getting them all. Well, I think we're seeing other build-to-suits too. But one of the keys I would add on this Paul on the build-to-suit business is having the right land positions. And we've always been very good in owning the right industrial land positions in the key markets. And really when you look at the deals that we did last year, substantially all of them -- I will say a 100% because I’m sure I have missed one or two in there, but it’s substantially all of them.

We're on our land. Like for example, Amazon or Chesapeake Commerce Center at Baltimore. Jim mentioned the two big ones we did at our AllPoints Midwest in Indianapolis. The deal we did in Minneapolis in the fourth quarter was on land that we've owned. So you really tell, one of the keys is having the land position and having the teams in place to deliver that build-to-suit.

Jim Connor

Well, that was going to be my point. If you look at the spec development across the country, we're doing a little bit and our peers are doing so. Some are doing a little bit more than others, but spec development is predominantly done by local merchant builders who tie up the site, go out and secure the necessary equity and go out and get financing, build the building, hope to lease it up and sell it and make a marble of spread. They're not in a really good competitive position to chase build-to-suits, because they don't necessarily own the land and they don't have the financing and everything tied up whereas we've got the land fully entitled.

We've got the construction leasing and development people in place and we don't have any financing contingency. So we're really much better positioned, particularly when you look at these large transactions, which we've been adding at just a bunch of into our portfolio. Local merchant builders find it hard to raise necessary capital to go out and do a million square foot build-to-suit for some of these big clients that we're doing with. Those are anywhere from $50 million plus to $80 million and they don't have the resources necessary.

Paul Adornato - BMO Capital Markets

Okay. Great. Thank you very much.

Denny Oklak

Thanks Paul.

Operator

All right. Next question come from the line of [Aaron Isakson].

Unidentified Analyst

Hey, good afternoon guys. Quick question on the land value, you guys have about $790 million land on your balance sheet currently. If you had to mark that to market today, what do you think that value would go to?

Denny Oklak

Well, it's going to vary, Aaron. But I guess when you think back over the last few years that market value is kind of varied. It’s been a little bit of a rollercoaster ride. But when I think -- when we start looking at it today, clearly, all that land, the values at or above are carrying value today.

I think in a lot of situations -- in certain situations, a lot of our industrial lands probably were 25% more than we're carrying it at. And even if you just look at some of the sales that we've done, which is not necessarily from quarterly end, but it’s still land as Mark said, we have what a, 10% to 15% profit margin on that 15% to 20%. So, I definitely think you could -- a very conservative number will be 10% to 15% value above the carrying value today.

Unidentified Analyst

Okay. And then you mentioned on your range of estimates, lands sale proceeds expected in '13. I would expect that does not include the land you plan to develop on?

Denny Oklak

That's correct, yes.

Unidentified Analyst

How much land do you think you'll monetize in development in 2014?

Denny Oklak

Yeah, I mean we've been running it. We went back and look there on about 10 to 15 year average between sales and development, monetizing about a $100 million a year and certainly some years are higher and lower than others. But not coincidently if you look at 2013 in total, we monetized about $110 million.

And I think that's probably pretty good going into '14 as well, that's combined land sales and development. So you got, call it $40 million, $50 million in our guidance for land sales and then that would lead to $60 million or so of development to get to monetize.

Unidentified Analyst

Okay. Great. Thank you, guys.

Denny Oklak

Thanks, Aaron.

Operator

Question comes from the line of Eric Frankel. Please go ahead.

Eric Frankel - Green Street Advisors

Thank you for taking the call. Just a couple of questions on the build-to-suits. Annual tenants from your -- are they exiting out of any buildings in your existing portfolio? I'm guessing Amazon is obviously not, but what about the others?

Denny Oklak

No, no. None.

Eric Frankel - Green Street Advisors

Okay. Terrific. Mark, can you remind us under build-to-suit for Amazon and the economics that's around that in terms of customary improvements that Amazon likes to have installed into a new development?

Mark Denien

Yeah, Eric. We in our development pipeline, they have a right to basically pay for the, what I call the above standard improvements either upfront or over the lease term. If they chose a lease term, it’s obviously part of the lease term is that are charged to them and it ends up at a higher return. We closed the lower return, because our assumption is that they are going to pay that off early.

So if you look at the development cost in our pipeline, it’s got the costs in there to build the building with the higher above standard. But the yield is the lower yield is that they're going to pay that themselves. Did I answer the question?

Denny Oklak

Let me just add to that. I guess, I would say it’s box mixed to us because if we funded, their payments are returned on over the term of the lease that is I will say roughly comparable to yield that we are getting on the project and if they pay it off, you know they pay it off and we just take it, redeploy back into the next development. So it’s in the initial numbers but it really hasn’t -- we do not view it as having any real effect to us.

Eric Frankel - Green Street Advisors

Okay, that’s helpful. I think the concern is just to make sure that investors aren’t capitalizing above market rent when they are trying to value the portfolio when its completed, so that’s just what I am getting at…

Denny Oklak

That’s what I -- that's why I wanted to say what I said because I think the way we are reporting it, it won’t matter.

Jim Connor

Yes because we are reporting the lower yield and the lower NOI, that’s right.

Eric Frankel - Green Street Advisors

Okay. So when it’s completed, will that -- we'll take a loan receivable in the above market portion that we are in?

Jim Connor

It is essentially exactly what it is, yes.

Eric Frankel - Green Street Advisors

Okay. Great. Just the next question on the New Jersey development, could you disclose what amount you have actually paid your partner for the industrial land? Was it at the original value that you allocated to at the purchase or is it something different?

Mark Denien

Our partner wanted us to actually market that land and we marketed that land and got a fair value for it. But I think as I recall, I mean it was roughly equal to our original purchase price, the fair value. I can’t remember exactly but there wasn’t a material difference between the original purchase price of the joint venture paid and what we have paid them for their half when all was said and done, is that your question, Eric?

Eric Frankel - Green Street Advisors

Well, that’s fine. That’s fair enough. I think and then just a quick question on the medical office portfolio. As I recall, I think you guys expected there will be -- get about $250 million in proceeds. So is it just a reminder that the future buyer is going to close on in the next month or so?

Denny Oklak

Yes. As a matter of fact, we have mentioned in the call -- in the script that we already closed 60 million all but one building was in that number. There is one other building that are hospital actually healthcare system, actually exercise their option and that probably because of some of ways -- they are right at first half that was probably one close till some time in February but everything else is closed.

Eric Frankel - Green Street Advisors

Okay. Great. I wasn’t sure if that was suburban office or medical office. Okay. Thank you.

Operator

All right. Our next question comes from the line of Michael Salinsky. Please go ahead.

Michael Salinsky - RBC Capital Markets

Good afternoon guys. Most of my questions have been answered, just had a couple of quick follow ups here. The 2% to 4% of total portfolio, can you break it out just because obviously you have got a little bit better growth potential, the occupancy on the suburban office like can you kind break out what’s your expectations are for the industrial portfolio?

Jim Connor

Yes Michael, It’s last I said earlier on. I remembered who asked the question, really, it’s really a similar growth. So we are looking at 2% to 4% for really each product type. On the industrial, I would tell you that let just pick a mid point and say you are 3%, about 1% of that 3% will likely come from occupancy like Denny said.

We still do believe we have some occupancy upside with the remaining amounts coming from rental rate bumps already in existing leases coupled with, we reported a 5% renewal rental rate growth in the fourth quarter. We expect that’s trend to do nothing but to give better as we head into 2014. So if you are -- say 3% mid-point on industrial, you got 1% of occupancy and call it 2% on rent, give or take. Does that help?

Michael Salinsky - RBC Capital Markets

Yes, that’s helpful. Second question just looking at kind of releasing trends for ‘14, if you look at the portfolio today, where is kind of the mark-to-market on the industrial portfolio. What I am really trying to get is what kind of acceleration should we expect in terms of releasing spreads in ’14. We had good momentum in the back half of the year, just wonder if you expect that to continue to acelate in ‘14?

Jim Connor

Yes, the shorter answer is yes. We absolutely anticipate the same kind of performance. We have done some internal analysis and marking, help me with some of the numbers. But we’ve gone back and looked at the role in our industrial portfolio which again is a little below normal which we think is by and large a good thing. But we have looked at the percentage of that role where the original lease that is in place was done back in the last five years of really a tough market. And help me between 2009 and 2011?

Mark Denien

Yes.

Jim Connor

Between 2009 and 2011 about 45% of the leases that are -- 45% of the leases that are rolling in ‘14 were signed between 2009, 2011.

Mark Denien

Right.

Jim Connor

You know either the peak of the downturn or still in the recession period, I would call it. So on that 45%, its rolling in that lease period. We certainly expect significant rental rate bumps.

Michael Salinsky - RBC Capital Markets

Okay. That’s helpful. Then the final part, just going back to our pervious question. Several of your peers have been more aggressive in taking down leverage. As you continue to sale down some of the suburban assets here, you are picking up really good cash flow because as to your point, its not necessarily FFO derivative. Why not be a bit more aggressive in selling some of suburban office assets given the execution that you had in the fourth quarter and first quarter and may be using a take up prefers or take down leverage a bit more just -- while fundamentals are good right now?

Denny Oklak

Well, I think we have a pretty aggressive disposition plan. I mean when you think we did about $877 million last year, we are talking still pretty significant number this year. I think we are more just very comfortable with where we are.

So one think I will comment on leverage though. And Mark can chime in here. Our leverages even without selling and redeeming preferred or paying down further debs et cetera. Our leverage metrics are going to get much-much better because of this development pipeline and the way we funded it and our coverage ratios will continue to improve. So we – you will still see fairly sizable. I will call it deleveraging because our numbers get better during the year.

Mark Denien

I mean, I agree with that Denny, I mean, especially the coverage metrics with deleverage profile.

Denny Oklak

Yes. Yes.

Mark Denien

You may not see as much movement in debt process and some things like that. But from a coverage perspective, they should improve significantly.

Michael Salinsky - RBC Capital Markets

And in the same sense, quite a bit of higher coupon debt relative to where you could issue in the market today, given the compression. They pulled back we’ve seen as of late in interest rates any impetus to may be I’ll little dip more active, more active and kind of pre-addressing some of the damage you have next couple of years?

Mark Denien

Yes I mean Michael, we really only have -- you go out -- you got to out the February of ‘15 before you really have anything of significance coming. We have $250 million to there and we did the transaction that I talked about earlier in December and we paid $8 million premium to take out debt about eight months early but then of that $8 million, we get about $3 million back immediately in the seven month period and interest saving.

So net-net it costs us about $5 million, so not too significant all in we like to rate. But the further out you go it gets pretty punitive to do those deal. So we are constantly looking at it but just really taking another interest rate bet and we believe interest rates are going to be rising but at the same time when you factor that premium in and look at it on an all in basis, it gets pretty costly.

Michael Salinsky - RBC Capital Markets

Fair enough. I appreciate the color guys. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Ki Bin Kim. Please go ahead.

Ki Bin Kim - SunTrust Robinson Humphrey

Thanks. Just a quick follow up. Your new rates on lease rollovers is really based on just purely renewals like it hasn’t been for a very long time. I was wondering if you could provide some data on what your rollover rate was for new leases.

Mark Denien

Well again the reason we haven’t done that in the past is that a lot -- most of the time or lot of time, you don’t release the same space. So it just gets confusing to do that. You know you get a look at, it goes confusing when you look at how much tenant improvement money you put in versus what the rates are.

So we always thought that the most accurate and reflective rate calculation of what’s really going on in the market is what we are able to do on renewals because generally your TIs are very well on renewals and I think particularly on the industrial side. And we think that’s a good market reflective as we have and that’s why we used that. So we up until this time anyway haven’t even really calculated that other number.

Ki Bin Kim - SunTrust Robinson Humphrey

So you basically do not track the estimate, your systems will basically track that status, that is what you are saying?

Mark Denien

Yes because as we go space by space and its just harder to track.

Ki Bin Kim - SunTrust Robinson Humphrey

Okay, thank you guys.

Operator

There are no additional questions at this time, please continue.

Denny Oklak

Yes, I would like to thank everyone for joining the call today. We look forward to seeing many of you during the year at industry conferences as well as hoping to get more of you at -- visit our regional markets. Thanks again.

Operator

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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