Duke Realty Corporation Q1 2010 Earnings Call Transcript

Apr.30.10 | About: Duke Realty (DRE)

Duke Realty Corporation (NYSE:DRE)

Q1 2010 Earnings Call

April 29, 2010 03:00 pm ET

Executives

Randy Henry - IR

Denny Oklak - Chairman and CEO

Christie Kelly - EVP and CFO

Mark Denien - CAO

Analysts

Josh Attie - Citi

Sloan Bohlen - Goldman Sachs

Jamie Feldman - Banc of America

Chris Caden - Morgan Stanley

Paul Adornato - BMO Capital Markets

Kevin Kim - McLarry

Michael Knott - Greenstreet Advisors

John Kerr - Wells Fargo

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Duke Realty quarterly Earnings Call. At this time, all participant lines are in a listen-only mode. Later, there we will an opportunity for your questions. (Operator Instructions)

I’d now like to turn the conference over to your host Randy Henry; please go ahead, sir.

Randy Henry

Thank you. Good afternoon everyone and welcome to our quarterly conference call. Joining me today are Denny Oklak, Chairman and Chief Executive Officer; Christie Kelly, Executive Vice President and Chief Financial Officer; and Mark Denien, Chief Accounting Officer.

Before we make our prepared remarks, let me remind you, all that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Some of those risks factors include our continued qualification as a re-general business and economic conditions, competition, interest rates, accessibility of the debt and equity capital markets, increases in real estate construction costs and also other risk inherent in the real estate business. For more information about those risk factors, we would refer you to our 2009 10-K, which we have on file with the SEC dated March 1, 2010.

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

Denny Oklak

Thank you, Randy. Good afternoon everyone and welcome to Duke Realty’s first quarter earnings call. On today’s call, I will touch on our views on the current economic indicators and how they affect our business. We will then highlight our performance during the first quarter of 2010 versus our strategic objectives. Christie Kelly will then provide an update of our first quarter 2010 financial performance and capital market activities in relation to our capital strategy.

As we look at the first quarter activity, it is clear that the economy as made some progress in the first quarter, but we believe there are still more progress needed before we see sustainable performance in leasing volume across all of our product types. However, from where we were just six months ago, there are sign that economic recovery is gaining traction. Early indicator such as GDP growth rising corporate profits and continued access to both to debt and equity markets are providing building block from more stable economy.

On the industrial front, a few items have note, retail sales continued to improve, trucking and shipping volumes have increased in the first quarter of 2010 based on year-to-year comps, and industrial production has risen over 5% since bottoming in June of last year and manufacturing employment increased in both January and February of this year signaling an expansion in growth. This is the first increase in these indicators since the start of our great recession.

With some optimism in the market we do see customers evaluating industrial space needs and inquiring more of our available product particularly with the strongest owners of quality space, we’re able to provide real estate solutions over the long-term. While economic growth may continue, it seems likely that job growth will remain subdued and unemployment will remain high for some time. This will slow the office sector in the near term, but is inline with what we anticipated for 2010.

Bottom line, there are two key themes for our business today. First, the bulk signs of positive as retailers continue to build inventories. Second the officer signs are still negative because of the suborn unemployment we’re seeing. In terms of our operating strategy and performance, we continue to be focused on leasing up the vacant space in our existing buildings to generate additional cash flow. Building up our previous medical office business development pipeline and perusing some build to suite our development opportunities.

Turning to the first quarter operating results, we thoroughly experienced positive momentum during the quarter. Our overall occupancy in our portfolio was 87.5%, at March 31, up from 87.2% at year end 2009. With our 2010 guidance, we anticipated in approximately 100 basis points decline in our occupancy, in our overall portfolio during the first quarter due to known terminations. While our known termination did occur, these forecast vacancies were offset by higher temporary and month-to-month tenants remaining in our space as well as increased momentum in leasing in our bulk industrial business.

Occupancy in our portfolio includes about 1.4 million square feet or about 1% of these temporary and short term leases. Our ability to retain this occupancy or convert the tenants in the longer term leases will be the key to maintaining our overall occupancy near the top end of our guidance range for the year. On the leasing front, we signed over 5.5 million square feet in leases during the first quarter. I’m pleased to report that this volume was our highest level in a first quarter since 2004.

Occupancy in our stabilized bulk portfolio was 89.5%, at March 31, 2010 up from 89.0% at year end 2009. We signed some significant transactions during the quarter including -- in Dallas we signed 10.5 year lease with American Standards as a fully lease a 626,000 square feet industrial building. In Atlanta, we leased 126,000 square feet of Mitsubishi Electric for 2.5 years. This lease increased the occupancy on the building to 100%.

In Phoenix, we executed lease for 117,000 square feet in our Goodyear One building, this lease within alternative energy provider for a term of 10 years. We also completed a significant renewal and extension of over one million square feet with CNH America covering two buildings in our Lebanon Business Park at Indianapolis. This transaction extends our tenants current lease to January 2020.

On the suburban office side, we’re not seeing as much activity, but have maintained the occupancy for a stabilized portfolio at 85.5% at quarter end, just marginally lower than the 85.6% at December 31. A couple of transactions to note on the office side, in Raleigh we signed a five and half year 70,000 square feet lease to backfilled space from the downsizing we completed with Lenovo in the fourth quarter of 2009.

In Cincinnati, we renewed 160,000 square feet with an existing tenant to extend the current lease to July 2021. While the decrease in the net effective rent on this one transaction made our overall growth in net effective rents on our office net renewals negative, we believe the transaction has been excellent long term lease for this building.

As of March 31, our wholly-owned development pipeline consisted of only three properties comprising 460,000 square feet, which were 99% pre-released within anticipated yield of 8%. These projects required approximately $17.1 million of additional capital to complete. Same property NOI for the quarter was a negative 2.5% in inline with our expectations. This is a significant positive trend from the fourth quarter of 2009, which was negative 5.9%.

I’m also pleased to report that our lease renewal percentage for the quarter was 82.7%. As the leasing environment takes up, we believe we’re well positioned with our un-stabilized portfolio of modern recently placed in service assets that can generate $40 million to $45 million of NOI of funds stabilization. As I mentioned, our operation strategy is focused on lease up of these assets, which totaled approximately 11.8 million square feet and are today 59.2% lease. Our team knows our objectives and we’re making progress even in a tough environment.

One other item was note. We believe that the new healthcare reform will be an increased driver for growth in our medical office business. We are seeing an increase velocity of projects in the marketplace now with the legislation has been approved. We believe this increases a long term trend in our healthcare team as well positioned to capitalize on this momentum.

I’ll now turn the call over to Christie.

Christie Kelly

Thanks Danny and good afternoon everyone. As Danny mentioned, I would like to provide an update on our financial performance and financing activity during the quarter with respect to our capital an asset strategy. First quarter recurring FFO was $0.28 per share compared to $0.50 per share for the first quarter of 2009, the decrease in recurring FFO from 2009 to 2010 is primarily the result of an increase in our weighted-average share count due to the current equity offering in April 2009. The results were inline with our expectations and the consensus estimates for the quarter.

Turning to the capital side of our business, we continue to address our near term debt obligation and execute on de-leveraging actions. In January, we retired $100 million of home secured bonds with available cash. In April, we successfully executed $250 million in offering of 6.75% senior unsecured note, due March 15, 2020.

The spreads was 287.5 basis points, which at the time was 25 basis points below spreads on our secondary bond, and 40 basis points considering new issue premium. Additionally, we had no maturities in 2020 prior to this transaction. We are very pleased with the timing and execution of this transaction and by the acceptance of our investors in the market.

We use the proceeds to repurchase 212 million power value unsecured bonds through a tender after comprised of the following. $66 million of our 6.95% March 2011 unsecured senior notes, $95.8 million of our 5.625% August, 2011 senior note and finally $50 million of our 6.25%, May 2013 senior note.

This tends to offer allowed us to reduce our 2011 unsecured maturity from $585 million at March 31 to $422 million upon the final closing of the tender office on April 20. As a result of these in previously announced capital transaction, we have $880 million available liquidity to repay our 2011 maturity and pursue strategic opportunities.

In February, we initiated an aftermarket program, which allows us to issue up to a $150 million of equity. We believe that this is an efficient need to raise capital I want to make clear that we have not issued any shares under this program today. We view this tool remain to utilize opportunistically given the volatility in the market and remains very disciplined in using that source of capital.

Turning to our capital recycling, we closed on $122.6 million of assets disposition during the quarter at an aggregate capitalization rate of 9.5%. Consistent with our stated strategy, the asset sold for mainly office and other non-strategic properties, included in these dispositions are the following. First, three office buildings in Raleigh that we sold to our CBRE Realty Trust joint venture and conjunction with another transaction, which I’ll touch on in a moment.

Four office buildings located in Columbus, Ohio totaling over 322,000 square feet, a retail center located in Cincinnati, Ohio totaling 360,000 square feet, and 247,500 square foot industrial building sold to user from a joint venture and which the company had a 50% ownership interest. The 9.5% cap rate is more indicative of the types of assets that we’ve sold in the current value of our long term hold portfolio. These assets for older and non-strategic assets dispositions, which helped us progress to our long term goal of being more weighted to both industrial assets.

To our joint venture with CBRE Reality Trust, we acquired two office building totaling over 222,000 square feet that are 100% leased located in South Florida, specifically the Greater Fort Lauderdale/Broward County area. The buildings were owned by CBRE Realty Trust and we’re contributing to the joint venture at the same time as the three of our office buildings in Raleigh was sold to the venture.

As of March 31, this joint venture with Duke Realty has a 20% partners, owns nine office and eight industrial assets with investment of over $450 million. We have at least $350 million in remaining capacity in venture and I’m very pleased with venture expect to be. We continue to look at opportunistic acquisitions with a focus on industrial and medical office assets. We’re seeing some fairly adjusted pricing on relatively small number of trades that are occurring in both products types. We are being disciplined in our closing pricing realizing that there will transactions that trade at a lower cap rates that we require.

The first quarter was a positive start to our capital plans in 2010. We execute over 100 million of assets sales retired over $100 million of all reaming 2010 unsecured bound maturities with available cash. We finance the portion of our 2011 debt maturity and we’re able to keep our unsecured line of credit at zero balance as of March 31.

With that, I’ll turn it back over to Denny.

Denny Oklak

Thanks, Christie. To close, I’d like to emphasize our strategic focus as we continue to move forward in 2010. From an operation strategy, we are focused on leasing up of our unstabilized portfolio and this development of pre lease medical office buildings and other builder suite opportunities.

Our asset strategy is driven by the ultimate goal of repositioning our portfolio from a concentration in Midwest suburban office assets to more investment in bulk industrial product and medical office properties. We have an identified action plan in a number of buildings to land parcels moving through the disposition process. We remain comfortable with our guidance $150 million to $350 million of dispositions through the year. We are extremely pleased with the execution of our capital strategy over the past year including a recently completed unsecured debt transactions.

Were driving operating fundamentals by focusing on lease up and selective pursuit development were progressing on our asset re positioning in a difficult environment and aggressively perusing our capital strategy by de-leveraging pushing out maturities and being prepared for growth opportunities. We remain focus on executing our strategic plan and addressing all factors impacting our value.

We have reaffirmed our guidance of $0.95 to a $1.15 -- per share for 2010, as we noted on our last call, we provided a wide guidance range this year because of the uncertainty in the economy. We are certainly pleased with our performance in the first quarter particularly in the bulk industrial leasing front, but there is couple of items, I would point out.

First revenues from much of our first quarter leasing activity will now began until the second half of 2010. Second we are seeing pressure on our tenants businesses and experiencing a couple of anticipated bankruptcies in the first quarter. Finally, the suburban office business is looking slower than we anticipated because as I mentioned earlier, the unemployment level is not dropping. Therefore, we believe a wide guidance range is still appropriate until we gain more clarity on the second half of this year.

Thank you again for joining us today. Now, we will open it up for the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Bilerman with Citi.

Josh Attie - Citi

It’s Josh Attie here with Michael. I guess first of all, what were the unanticipated bankruptcies at first quarter? Have those been reflected in the occupancy yet?

Denny Oklak

They were reflect in the occupancy at March 31, Josh there was bit a couple on we actually have an industrial bankruptcy over in Savannah, we had at office bankruptcy down in Orlando that we just didn’t anticipate and so, there is still a lot of pressure on the tenants. The economy is beginning to turn that there are still a few folks that I would call hanging on by the finger nails. So we don’t think that we’re really out of them will yet on our tenant base.

Josh Attie - Citi

For the months-to-month tenants that you mentioned in your prepared remarks, what’s the tone of your conversations of them in terms of signing them onto longer-term leases? What are their pressure points? Is it just a question of rent, or are they still unsure of where their business is going and if they’re going to need the space?

Denny Oklak

Yes, I think that the tenant of the discussions really varies across the board on that, some of the folks just want the temporary space. The know they’re not going to needed long-term, but for the most part it’s more of an unwillingness to sign a longer-term lease, because they’re just still not comfortable with their business. A number of these month-to-months are actually expansions of tenants. So tenant in front of this, we need a few more 1,000 square feet, but we don’t want to do it on the long-term basis right now, but we like to do it out of short-term basis.

Obviously, if we have the space available adjacent in this environment, we are willing to do that and then once we get into this space we’re constantly trying to get off them to extend that and enter into a long-term lease.

Josh Attie - Citi

Then my last question is, of the leasing that was done in the quarter, how much of it has been for the new unstabilized assets? As you lease that space, how do the rents compared to the market rents in those markets?

Denny Oklak

Yes, the one lease that we mentioned on the 626,000 square foot deal with American Standard down in Dallas that was one of our newer spec buildings that spec building was actually leased initially for a year, but then it’s been vacant for about 18 months or so since then. So that will now off the market and I think there was a couple of other ones that we filled part of the couple of buildings including one other industrial building and we filled up one of our basically stabilized, I would say one of medical office buildings in the quarter.

Josh Attie - Citi

As you lease that vacant space, how are the rents versus what the market rents are?

Denny Oklak

They are market rents, but I think you can compare it to our original pro forma they are substantially below our table. What we’re really trying to do with these is still a tough market on the pricing side, even in the bulk industrial and so, typically what happens is, we have more of free rent period that we perform it and normally we would perform in a normal times very little free rate on upfront on an industrial building maybe two or three months of the most. We’re probably in the nine to 12 months sort of with one month for year of term today, our rents on the initial phase rents are probably down 30% to 35% from our original pro forma, but we’re getting this bumps.

We’re very focused on, it’s within a two to four year period depending on the market and the tenant getting that phase rate back up to pretty close to where we perform it and where we’re able to do that generally speaking today.

Operator

Next we go to line of Sloan Bohlen with Goldman Sachs.

Sloan Bohlen - Goldman Sachs

Denny, I think I see where you’re going on the guidance, but just one or two quick questions on the quarter. The 100 basis point decline that you expected in occupancy in the quarter, was that entirely made up by the month-to-month tenants, or was there better leasing volumes or kind of combination of both?

Denny Oklak

It was the combination of both of both, but I would say probably a little bit more weighted towards the new leasing activities.

Sloan Bohlen - Goldman Sachs

I think for your guidance for the year originally you’d set out same-store declines of anywhere between 2% and 5%. Then it looks like you’re commenting at the lower end of that range. Could you maybe give us thoughts on where you expect the rest of the year to ramp?

Denny Oklak

Yes, I think it’s falling on our guidance was negative 1% to negative 5%. Right now, again it’s a really dependent on how the leasing activity goes for the rest of the year, but I think we’ll be closer to the lower negative. Our guidance is closer to the negative 1% and the negative 5% for the year.

Sloan Bohlen - Goldman Sachs

With regards to those bankruptcies you had in the first quarter, is there anything else on your watch list that’s crept up, or those were fairly unanticipated as you said, but anything else that you’re taking a closer look at?

Denny Oklak

Well, we still have a fairly sizable watch list in today’s environment. So we are looking closely, and it’s really not the watch list tenants that worried so much, because we pretty much know where they stand. It’s the one that who trying to come out of the blue that we manage all of our own properties. So our Property Managers are very close to our tenants. So we think we have a good handle on all those folks, but everyone who are one comes of the blue then even our local Property Managers didn’t anticipate and those who are a couple of the ones in the first quarter, so those are the kind that make us nervous.

Sloan Bohlen - Goldman Sachs

Then just one question on the capital strategy, again with the sales it looks like you even ahead of schedule there kind of at the low end of your range already. Could you talk about what pricing has maybe been done since you’ve done those sales? Whether there’s been any thought as to try to an increase that given that maybe there’s more activity going on?

Christie Kelly

I think first of all, I will answer the part of the question first and then turn it over to Denny. Just in terms this use on pricing, but from a disposition perspective, first we’re comfortable with our guidance and in the 150 to 350 range. We do think we’ll come in more towards the upper end of that range as it relates to those in disposition. Our mandate positions, if you take the whole high as non-strategic, we had given guidance at the $20 million and $50 million range and that is really slow right now as you can imagine when we close sort of first quarter just a couple of million.

Denny Oklak

The only thing I would add that one was, as you will recall on the first quarter, call we said that our dispositions for the year were going to be waited towards the first half of the year, because we have quite a few things pretty far down the way, so we did close on a lot of those in the first quarter, again we have a pretty strong pipeline here into the second quarter. So overall, we’re really looking as that 150 million to 350 million range, and then answer to your question, yes we are always as we know we still we have a fairly sizeable portfolio that’s in our targeted disposition list as part of our asset strategy to reposition the asset.

so we are looking at some of those other assets to see if there are opportunities to accelerate those dispositions, but still again I think, when we look at the year sitting here today we’re still pretty comfortable with that top end in the 350 million range.

Sloan Bohlen - Goldman Sachs

Okay and just anything else in the pricing since the sales?

Denny Oklak

No I think, I guess just as it overall comment the pricing for most assets generally seems to be getting better and I think that was a case really in the first quarter both on our business. We’re not really selling any industrial, but where we looked at a number of industrial acquisitions and I think the cap rates have continued to decline on the industrial product.

On the office product they’ve firmed up I would say. So I think there’s generally speaking, a fairly consistent market out there now for even other suburban office assets although they’re still a little bit tough for the kind of assets that are sold to local buyers, because that typical bank financing is still not available out there today.

Operator

Next is the line of Jamie Feldman from Banc of America.

Jamie Feldman - Banc of America

Just a couple of follow-ups from some of the questions already asked. So the 1% to 5% negative same-store guidance, is that cash or GAAP?

Denny Oklak

Cash

Jamie Feldman - Banc of America

That’s cash, okay and without lease termination fees?

Denny Oklak

Yes, we exclude any building that had $250,000 or more lease termination fee in it. We exclude from the population.

Jamie Feldman - Banc of America

You guys survived leasing spreads for the renewals, but do you to know they would have been for all leases signed, if you were to blend them on a cash basis?

Denny Oklak

We don’t look at that and we really never have Jamie, the reason for that is, it’s not all that often that we lease the exact same space that the tenant terminated in. So in other words, a tenant made terminate a 100,000 square feet, we lease that in a 20 or 40 and afford to you something. So it’s just a little bit harder to really match everything up, so we’ve never done that and we really we don’t track that internally.

Jamie Feldman - Banc of America

I guess what I’m trying to get at is just as we think about lease expiration, what the mark-to-market would be for kind of this year and kind of next year?

Denny Oklak

I don’t think it’s a whole lot of different than our renewals. There was nothing that I’ve seen over the years to say that, it’s going to be significantly different in the regional, and I would tell you especially today, I think that’s true, because even on the renewals generally speaking our customers have tenant we have brokers involved in. They know the market, so you can usually were we do better on the renewals is less capital expenditures. So that’s what we’re really focused on the renewal side. Their rental rates were pretty close to what any market rate would be.

Jamie Feldman - Banc of America

Then in terms of the dispositions you think your thinking (inaudible), what are you thinking about cap rates there?

Denny Oklak

I’m sorry, of the acquisitions did you say?

Jamie Feldman - Banc of America

I’m sorry, dispositions.

Denny Oklak

Dispositions, well I think when you look at the disposition of list that we have against for the most part today is those non-strategic assets. So I would tell you that I think it’s probably going to stay somewhere in that nine to 9.5 range, maybe 8.5 to 9.5.

Operator

Next we go to the line of Chris Caden with Morgan Stanley.

Chris Caden - Morgan Stanley

Two quick questions, one as if you look at your industrial lease role over the next 12 to 24 months. What are you anticipating in terms of tenant retention and how much of the tenant for utilizing the space at this point? Then second is, across the markets, if any color across your markets will be appreciated?

Denny Oklak

Okay, sure Chris. We’ve really experienced a very high level of renewals over the last 18 to 24 months and I think as we’ve been saying, the tenants just not really inclined the road. The only time they’re moving right now, is to really consolidate several operations for efficiency. We’ve been the beneficiary of that with some of our larger bulk spaces.

So tenants are inclined to stay as similar to my comments on the month-to-month leases where a tenant comes to us and say, they’d like to expand, but they’re just not ready to sign a long term lease yet. So you think where we’re staying in a building. Real they want to stay and so, I think we’re going to continue to see the pretty high renewal rate a range on the industrial buildings and the second part of that question I forgot that was the second part....

Christie Kelly

On the lease maturity schedule, I think you are adding, what are we seeing going forward, our maturities are really well-balanced going forward. So on average, we’ve got 10% and there is really no ladder or no geared that’s really in excess of 12% to 13%.

Mark Denien

With the other part of your question I’m sorry was a utilization Chris, this space is being utilized, the industrial tenants they don’t want to leave that space sitting vacant. We probably have a little bit more of that shadow face in the office site today, but not in the industrial site. Then just looking kind of high level of the markets, generally speaking, I would say, the industrial activity has picked up pretty much across the board, varies a little bit market-by-market, but we’ve fill buildings almost everyone of our markets now over the last six to nine months.

So I think it’s a positive sign on the industrial, it’s interesting to me that there’s lot to talk about Savannah and the pickup in the port activity, but we haven’t seen a lot of our additional pickup for momentum in Savannah, we’re still doing fine there, but we haven’t seen a lot of pickup. Midwest markets continued to show some good activity down as Atlanta, Chicago or still tough markets, because they’re still a fair amount of vacancy out there in newer buildings, but those deals coming around today.

On the office side, I would say it’s really pretty much opposite of that that it is pretty slow all over. There is a couple of exceptions in our cities today, I would tell you that the portfolio we have in Washington, DC is doing very well and very highly occupied, our rental rates are strong. So that market is I’m sure it we’ll put imagines was doing well. Raleigh seems to be doing very well, I mentioned we downsized with no wall in the four in the four quarters. We’ve now virtually filled all that space from their downsizing. Then the other market that really continues to seem hold up well is our South Florida, assets which got a three nice office presence down in Broward County and that one seems to be doing well.

Operator

Next we’ll go to line of Paul Adornato with BMO Capital Markets; please go ahead.

Paul Adornato - BMO Capital Markets

I wanted to follow-up on the medical office side of the business. First, I was wondering, if you could characterize the development opportunities. What size of our development pipeline would you be comfortable with, let’s say two years down the road? Secondly, in the past you guys have been successful in kind of making the large strategic shifts relatively quickly, and so to that end, have you seen any large medical office portfolios out there and if so, does the pricing appeal to you?

Denny Oklak

Paul, first on the development side, the opportunities are picking up, we have it. There is nothing that we’ve announced as to start this year, but in that industry you get award at the project and then there is still a pretty long timeframe before that project actually it gets all signed up and starts and we don’t really count it until it starts.

So I would tell you today, we have probably been awarded project somewhere in the range of $50 million to $70 million of that we think we’ll start some time later this year or early next year and that’s pretty much in line with our guidance. Our guidance for this year was to do development starts between $100 million and $200 million and we said that, probably at least 50% of that would on the medical office side and the rest would be in some building suites.

Paul Adornato - BMO Capital Markets

Do you see that potential increasing in the future, or is that kind of a max type of development pipeline that you…?

Denny Oklak

Although, I definitely think we can increase that. If you look back Paul to 2006 and 2007 and even really in the first part of 2008, we were running more in clip of kind of the $250 million a year start range, so I think we will get back close to that level. In the healthcare providers haven’t been without their issues during this downturn and then I think clearly this whole healthcare legislation issue just put a lot of things on hold. So we do anticipate the velocity of picking up in that business now.

Then on the question on acquisitions, we have seen a few obviously, you all have seen a few of the medical office transactions trade in the market. We’ve looked at a few of those, but again I think the pricings not quite where we would like to see it for our purposes. I think where we will not have some on acquisitions, is working with the major hospital systems that our clients and acquiring some properties directly from them as part of ongoing development opportunities. We’re seeing a few of those and I think that’s where most of our acquisition activity will come from

Operator

Next we go to line of Kevin Kim with McLarry; please go ahead.

Kevin Kim - McLarry

So if you look at your demonstrated schedule, it looks like the (Inaudible) pretty much taking care of how much of the 2011 the maturity is? Are you expecting to proactively deal it in this year?

Christie Kelly

Kevin, we are expecting too, opportunistically by whatever we can.

Kevin Kim - McLarry

Okay, and in terms of issuing new debt, are you comfortable with carrying a balance in your line of credit, or are you looking to match fund that so, issuing you that as your buying back, longer term.

Christie Kelly

We in alignment with our capital strategy Kevin, we would look to match front.

Denny Oklak

Again, the only thing I would add to that Kevin, again I think it was really a successful quarter with Christie and her team, because we now have those 2011, non-secured maturities below $500 million, which just 12 months ago, they were at $1.1 billion and we had $700 million on line. So we’ve made tremendous progress here. The issue we have now is we got about as much of those 2011 maturities with this tenders we could get. So you’ve almost got a way to pay them off in maturities, because nobody else wants to give them up. So we’ll continue to look for opportunities, but we’ll fund those in 2011.

Kevin Kim - McLarry

So if you try to payoff early, what kind of distinguish in fees, which would be looking at?

Christie Kelly

They’re really, I think that’s just more of a hypothetical key thing, aggressively as we possibly could for the 2011 and to that point, we were even just a bit light. So we came in at for example $66 million on one charge and we’re pricing for $75 million and --

Denny Oklak

Is that 5% to 6% --?

Christie Kelly

Those are 5% to 6%.

Denny Oklak

5% to 6% premium?

Christie Kelly

That’s correct.

Kevin Kim - McLarry

Last question, if you look across your JV partnerships could you remind me are there any expiration targets for the joint ventures and at driven risk in terms of as to assets are working to that, what would happen that tough situation?

Denny Oklak

The only near term maturity we have is, as we talked about is in our Dugan joint venture. We have a $200 million loan coming due, secured loan coming due in October of this year that loans taken out of as a 10 year, CMBS loans that was taken out of 2,000 and about 50% loan to value.

Christie Kelly

That’s right Denny and we have that in our cash forecast --

Denny Oklak

Sure here is that $100 million.

Operator

Next we go to line of Michael Knott with Greenstreet Advisors; please go ahead.

Michael Knott - Greenstreet Advisors

I was wondering if you can just provide some color on the deals you referenced, Christie, that some transactions in the market that were aggressive, but in just maybe location, product type, any commentary you can provide, just give us a little color on your comment there?

Christie Kelly

Sure, Michael. I’ll take it off and then to the extent it to anyone, who have any additional color or follow-up. We’ve been active in the market and specifically we’re seeing a record pricing on a news to everybody in the Southern Cal area where some industrial portfolio that we were perusing, as well in South Florida.

We were surprised by some activity in some less, I would say more secondary markets such as the Raleigh areas and specifically have been able to execute as we announced in our press release. Our end markets were they are not specifically marketed transactions that something that we would do specifically with relationships that we have, but there’s very aggressive pricing out there. I mean in terms of cash and cash yields and NOI. We are looking at 6% to 7%.

Dennis Oklak

Michael, I would say that on the industrial side, there isn’t whole a lot trading, but it doesn’t seem to matter where it is right now, so I’ll trading pretty aggressive with it.

Michael Knott - Green Street Advisors

It sound like it’s more aggressive on the industrial side, almost without respect to location in terms of Southern California versus other industrial markets?

Dennis Oklak

Yes, that’s right. We’re not really working at any office acquisitions, so our input to you would be on the disposition side on the office and then on the medical office, we haven’t looked a whole lot there, but what we monitor seems to be pretty aggressive, again without regard to geographies.

Operator

Next, we’ll go to the line of Brendan Mariana with Wells Fargo; please go ahead.

John Kerr - Wells Fargo

This is actually John Kerr here for Brendan. I got a couple of housekeeping items first. Looks like your capitalized interest dropped about $2 million per quarter sequentially. That’s a pretty big drop, that’s about $8 million per year. What caused that big drop?

Dennis Oklak

Well, we just got a note, development going on right now. Our development pipeline is moving out and virtually everything we’ve got is completed. So once the development is complete, we start capitalizing the interest.

John Kerr - Wells Fargo

Well, I mean that’s about $125 million in debt that’s without being capitalized, right?

Dennis Oklak

Yes that’s probably about right. You didn’t talk about the debt on our development pipeline, right?

John Kerr - Wells Fargo

Yes. So I don’t think you guys delivered $125 million, worth of development this quarter, is that right?

Dennis Oklak

This quarter, I think it was probably pretty close to that, the shell completion.

John Kerr - Wells Fargo

Yes. We can catch up offline for that and just could you remind me if the G&A for Q4 that included around $2 million in severance costs? Is that right?

Christie Kelly

For Q4, that’s correct.

John Kerr - Wells Fargo

The G&A for this quarter, I really didn’t go down. So was there something else that’s hitting it or is that a continuation of the severance costs?

Dennis Oklak

In the first quarter, our G&A is always higher because our volumes are just less with disruption and generally leasing quite honestly. So first quarter is typically our highest quarter for the G&A, when you look at, yes no surprise in stock compensation awards included in that first quarter number.

So when we’re looking at G&A right now as far as compared to our guidance, our guidance was for the top end of that to be in the $45 million range. So I think today we would say we’re probably going to be close to that top end, but we’re not into $13 million quarter run rate, whatever we were this quarter.

John Kerr - Wells Fargo

Denny, I think you talked about trying to get out of Midwest office and into bulk industrials, but are there specific markets that you’re looking at for potential acquisitions?

Dennis Oklak

Yes, the concentration is in some of the newer markets that we are in where we don’t have a large presence today and on the industrial side and three that I would point out was the four, I guess would be, one would be Huston that is our target market. We’ve been there for a couple of years and we may grow that industrial portfolio. We also want to grow our South Florida industrial portfolio. We’ve got pretty much in office presence down there but not in the industrial presence today.

We’re also looking at kind of the Washington DC Baltimore corridors. We’ve got a relatively small industrial presence there too, but we’ve got a nice big office presence, so we like to grow there and then finally we’re keeping an eye on Phoenix, I would say. We ultimately want to grow our portfolio in Phoenix; obviously that is a tough market on the industrial side today. But we did acquire a one off building in Phoenix this quarter. It’s a 100% lease, were some long term leases that very nice building. So inside of those markets we can do it one of transactions.

Operator

Our last question will comes from the line of Michael Bilerman with Citi.

Josh Attie - Citi

This is Josh Attie again with Michael. The asset sale markets really started to heat up and I think you had a multiyear asset sell plan. When you think you’ve originally scheduled to sell in year two or three are you thinking about pulling any of that forward to maybe the second half of this year?

Dennis Oklak

What you and Michael looking to buy the next second half of this year. I think I’d mentioned liking somebody try to ask that question nearly a year looking through that try to disposition loans and seeing if there are some things we can accelerate I would say again those more specifically a lot of those properties are going to be a fair number of those are going to be local buyers of that need some typical bank debt financing and that market still – is it really back yet lots of the other capital markets have comeback and that one doesn’t seem to be yet.

Josh Attie - Citi

Then just a modeling question, it looks like JV income increased the lot this quarter versus last quarter. Was that the assets that you sold into your CBRE joint venture?

Christie Kelly

Yes, that’s the part of it.

Josh Attie - Citi

What’s the other part?

Dennis Oklak

We had a buyout come through one of our joint ventures right, and I would say that was -- 900,000. 900,000 of buyout is part of that variance.

Josh Attie - Citi

Then the rest of it for the assets you sold to the JV?

Dennis Oklak

Yes

Josh Attie - Citi

Was there anything else?

Dennis Oklak

No.

Operator

Mr. Henry, any closing comments there?

Randy Henry

Yes. Just want to thank you everybody for participating and this concludes our first quarter earnings call.

Operator

Thank you. Ladies and gentlemen, this conference is available for digitized replay after 5:30 pm, Eastern Time today, through May 7, at midnight. You may access the digitized replay service at anytime by calling 1800-475-6701 and enter the access code of 152241. International participants may dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844 with the access code of 152241 and it is available after 5:30 pm Eastern Time today, through May 7 at midnight.

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

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