Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Duke Realty Corporation (NYSE:DRE)

Q1 2014 Results Earnings Conference Call

May 01, 2014 03:00 PM ET

Executives

Ron Hubbard - President of Investor Relations

Denny Oklak - Chairman and CEO

Jim Connor - Chief Operating Officer

Mark Denien - Chief Financial Officer

Analysts

Kevin Baron - Citi

Blaine Heck - Wells Fargo Securities

Vance Edelson - Morgan Stanley

Jamie Feldman - BofA Merrill Lynch

Eric Frankel - Green Street Advisors

Paul Adornato - BMO Capital Markets

Dave Rodgers - Robert W Baird

Michael Salinsky - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty Quarterly Earnings Conference Call. For the conference all the participants are in a listen-only mode. There will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions).

And as a reminder, today’s call is being recorded. I will now turn the conference over to the Vice President of Investor Relations Mr. Ron Hubbard. Please go ahead, sir.

Ron Hubbard

Thank you, John. Good afternoon, everyone. And welcome to our first 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, 2013 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. Good afternoon, everyone. Today I will highlight some of our thoughts on the overall real estate operating environment and how this is affecting us. Jim Connor will give you an update on our leasing activity and development status. I’ll review our asset recycling activity and Mark will then address our first quarter financial performance and balance sheet activity.

We followed up our very strong 2013 with a solid start to 2014 on all fronts. We signed 6.1 million square feet of leases in the first quarter and ended with overall occupancy at 93.6% overall, which includes projects under development. Rents on renewal leases for the quarter grew by nearly 7.9% reflective of strong supply demand fundamentals and improved pricing power. We started a $108 million of new bulk industrial development projects. Three of our five development starts this quarter, are 100% pre-leased, while two industrial projects we started on a speculative basis in Houston.

We made progress on our 2014 disposition expectations during the quarter by closing on $79 million of transactions along with several other transactions being in various stages of marketing and negotiations.

Now I’ll touch on market conditions. Demand drivers remained solid and supply is still relatively in chat for the industrial sector. We firmly believe the secular e-commerce story and the supply chain reconfiguration trends have a long runway and we are in an enviable operational and development platform position to take advantage of growth opportunities. The health care demand drivers for modern outpatient space also has a very bright long-term outlook. We expect the solid year of MOB development starts and further lease up of the existing portfolio. The suburban office sectors continues to improved across most of our markets and we're optimistic about further lease up in the portfolio, our three month occupancy is up over 300 basis points compared to the prior year on a same property basis, which adjust for our sizable office disposition activity. As noted on the last call, we still expect some great opportunities developed office at very strong yields on the office portion of our remaining land bank.

Now I'll turn it over to Jim Connor to give a little more color on our leasing activity and development pipeline.

Jim Connor

Thanks, Denny and good afternoon, everybody. From an operational standpoint, we had very solid quarter leasing at 6.1 million square feet as Denny noted. Overall occupancy ended at 93.6% dropping slightly from year-end which was expected. Most of the impact was from seasonality in our both industrial products into a lesser few lease by out. Our theory remains very strong and we anticipate occupancy heading backup in the second quarter.

We did have a few lease expirations that were expected that push down our tenant retention from the quarter to 65%. However, please to note that two leases totaling roughly 500,000 square feet were immediately back filled with different tenants pushing our effective retention into the high 70% range. Rental rate growth on renewals continues to improve across the portfolio with growth of 7.9%. We continue to be very focused on pushing rents throughout the portfolio of the investment side.

Now I'll touch on some key activity within each product type for the first quarter. The industrial sector for the quarter, PPR54 index reported over 30 million square feet of net absorption continuing the solid trend from 2013 and a roughly 10 basis points drop in vacancy from the fourth quarter to the mid 7% level.

Most research firms are projecting for the year that demand will outpaced supply at two to one margin and we are seeing the majority of the demand in the larger modern bulk space. I am proud to see our team has continue to win many of this build is evidence by the three new projects we announce this quarter.

The execution on external growth is a testament to our 40 year of reputation in the business having our own construction company and our strategic land bank. With respect to leasing in our industrial portfolio, we continue to see fundamentals improve with the completion of 5.5 million square feet of total leasing a level slightly above the comparable period from one year ago.

In service occupancy in the bulk industrial portfolio at the end of the first quarter was 95%, 140 basis points higher than a year ago as noted a majority of lease explorations were short term seasonal deal and we expect to be able to improve on our current occupancy throughout the year.

Many of our larger industrial deals this quarter were in Atlanta and Savannah markets which are reflective to strong fundamentals in the south eastern part of country. We signed six new leases and one renewal on these markets all between 200,000 and 520,000 square feet including a 10 year lease with [Mizuno] and 15 year lease with Brighton Best.

We also signed 240,000 square foot new lease for the major food service company in Indianapolis and a 250,000 square foot lease with (inaudible) Cincinnati. Turning to the medical office this portfolio is in great shape with our in service occupancy at 93.7%, that’s nearly 300 basis points above what it was one year ago and we have a weighted average remaining lease term of over 10 years.

The suburban office market continues to improve slowly with national absorption, maintaining a positive trend for 16 consecutive quarters, vacancy levels are down 40 to 50 basis points compared to a year ago and concessions continue a downward trend.

Our in-service office portfolio ended the quarter at 88.1% leased up 30 basis points from a year ago. As Denny alluded in the opening remarks, when adjusted for our active office disposition program, the average same property occupancy for this quarter is up some 330 basis points over the prior year, reflecting a strong performance in this asset class.

With regard to leasing, we had a nice quarter of signing about 0.5 million square foot of deals including a 70,000 square foot new lease with (inaudible) in our St. Louis market.

Turning to development, for the quarter our pipeline is still very strong, we started a $108 million of industrial build to suits and speculated projects totaled 1.8 million square feet, with a weighted average GAAP yield of 8.2%. And I know we had a solid pipeline of prospects for the remainder of the year.

Last quarter, we announced a start up of 1 million square foot build to suit for Amazon in Baltimore, this year we're pleased to announce the second build to suit with Amazon in the same park, this time of 346,000 square foot facility that’s leased for 15 years.

We also started a 744,000 square foot project in our West Jefferson Park in Columbus, Ohio. This facility is a 100% leased to Bon-Ton Stores, a major retailer for a term of 10 years.

In the Atlanta market, we started a 257,000 square foot expansion of an existing facility for Dick's Sporting Goods at our Camp Creek Park, near Hartsfield Airport with a lease term of 11 years.

We also started two speculative industrial buildings totaling 480,000 square feet in Houston in our Gateway Northwest Businesses Park. The vacancy in Houston is currently only 5%. Last year, Houston had 1 million square feet of spec net absorption and over 7 million square feet of total net absorption in the marketplace.

A quick note on the new supply outlook for the industrial sector. Spec projects in our markets for the first quarter of 2014, totaled 95 million square feet. This is approximately 15.5 million square foot increase over the fourth quarter of 2013.

During that same period, leasing in those spec projects increased by about 6 million square feet. The first quarter of 2014 solid percentage, leased of the spec inventory increased by 11% to 24% overall. In this context and as we’ve alluded to in past earnings calls, supply is relatively disciplined in essentially all of our markets at this point in the cycle compared to historical levels. But we continue to monitor this activity closely.

From an overall development pipeline perspective, at the quarter end we have 25 projects under construction, totaling 7.5 million square feet and a projected $608 million in stabilized cost that our share that are 86% preleased.

These projects have an initial cash yield of 7.6% and a GAAP yield of 8.3%, an evidence of our ability to create significant value through our development platform. As they are being developed at an estimated 20% plus margin, I’d also like to point out that at 86% preleased we’ve minimized most of the risk, most of the risk has been eliminated on these projects.

Given that we have entitled land positions and we can support roughly 45 million square feet of bulk industrial development and given our relationships and track record at winning major build to suits with top customers, our development platform is in a dominant position to continue to drive incremental cash flow growth over the long haul.

And now I’ll turn it back over to Denny and he can touch on our asset recycling activities.

Denny Oklak

Thanks Jim. With respect to investment activity, we had $79 million of dispositions during the quarter, majority of the proceeds were from two medical office assets that closed in January that were part of a larger portfolio sale discussed last quarter. The remaining disposition proceeds were from a flex portfolio in Indianapolis. We continue to strategically reduce our portfolio, our flex portfolio and are now down only 37 buildings totaling 2.3 million square feet across the system. We will continue to be opportunistic in disposing of more of our suburban office assets particularly in light of the aggressive equity capital and cheap debt pricing.

We’re actively marketing several significant projects or portfolios and still expect to be within our annual disposition guidance with significant closings late in the second quarter and into the third quarter. On the acquisition side this quarter we recycled a small portion of our disposition proceeds into a 407,000 square foot modern bulk solely located in Atlanta and leased to UPS supply chain solutions.

The facility is located just east of Hartsfield Airport inside the 285 Beltway. This facility is a 100% leased with 3 years remaining on the term with rents are currently a little below market and pricing provided an excellent basis of $43 per square foot.

In general the acquisition market continues to be intensive competitive and given our strong development pipeline and opportunities we expect our acquisition activity to be highly selective and strategic in nature.

So, now I’ll turn the call over to Mark to discuss our financial results and capital plans.

Mark Denien

Thanks Denny. Good afternoon everyone. As Denny mentioned, I’d like to provide an update on our financial performance as well as an overview of the capital transactions for the quarter. Core FFO for the first quarter of 2014 was $0.28 per share compared to $0.29 per share in the fourth quarter of 2013 and $0.26 per share in the first quarter of 2013.

Core FFO was down $0.01 per share from the fourth quarter of 2013, due to increased general and administrative expenses which were mainly driven by the accounting rules, which require us to immediately expense the substantial portion of our annual stock compensation brand. Along with lower absorption of overhead costs due to the decrease in leasing volume from our record fourth quarter of 2013.

The first quarter is always by far our highest quarter of G&A expenses for these reasons. We are still comfortable with our full year guidance of G&A expense of $40 million to $44 million. The improvement in core FFO per share over the first quarter of 2013 was due to improved operational performance and development deliveries as well as decreased interest expense.

Same property NOI growth for the 12 and three months ended March 31st was 3.0% and 2.2% respectively due to increased occupancy and growth in rental rates. Same property NOI growth for the three months ended March 31st was constrained by increased snow removal and utility costs driven by the extreme weather conditions in many parts for the country.

In spite of these increased operating expenses in the first quarter, we are still comfortable with our full year same property NOI guidance of 2% to 4%. Also regarding NOI, this quarter we introduced a new exhibit to our supplemental package which includes a breakout of NOI and square footage by market and by property type. This additional disclosure should better assist everyone in valuing our company.

As Jim noted, our growth and average not affective rent on renewals was 7.9% for the quarter with positive rental growth across all three product types. We are optimistic about our ability to continue to push these rental rates. We generated $0.25 per share in the AFFO, which equates to a conservative dividend payout ratio of 68% compared to $0.21 per share of AFFO for the fourth quarter of 2013. We incurred a significant amount of building improvements in second generation leasing cost during the fourth quarter of 2013 whereas our capital expenditures during the first quarter of 2014 were more in line from our ongoing run rate.

We are pleased with maintaining our continued strong operating results and now I will quickly recap our capital position. We finished the quarter with $180 million outstanding on our $850 million line of credit as compared to $88 million outstanding on the line of credit at the end of 2013.

As Denny noted, we anticipate increased disposition activity during the next two quarters which will allow us to repay our current line balance and fund continued development costs. We are in a very good liquidity position and have no significant debt maturities until February of 2015.

In addition I am pleased to report during the quarter our credit rating for senior unsecured debt was reaffirm by Moody’s at BAA2 with a stable outlook and upgraded by Standard & Poor’s to mid BBB + or mid BBB with a stable outlook. These actions by the rating agencies are a testament to our improved overall leverage profile, high quality assets very stable cash flow profile and continued focus on further improving our balance sheet.

I will conclude by saying that I am very happy to report another strong quarter and with that I will turn it back over to Denny.

Denny Oklak

Thanks Mark. Yesterday we narrowed our guidance for FFO per share for 2014 to $1.12 to $1.18 with solid results in the first quarter, we set the stage for our strong 2014. So in closing I will reiterate that we believe our team and our portfolio is in a unique position to take advantage of strong fundamentals in all businesses. The value creation potential for shareholders is very high. We thank you again for your interest and support of Duke Realty, we'll now open the lines up to the audience and we ask participants to keep a dialog to one question or perhaps two very short questions. You are of course welcome to get back in the queue. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). And first from the line of Michael Bilerman. Please go ahead.

Kevin Baron - Citi

Hi, this is Kevin Baron with Michael. Last quarter you mentioned that sales would be more weighted through the first four months. Now that has been pushed back a little bit. Can you walk us through what's causing the delay, and then in regards to guidance, can you comment on how that impacts FFO for the remainder of the year? Because it would imply a near-term boost in FFO just given the delay on asset sale dilution. And then secondly, has the shift in timing of assets impacted the timing of capital deployment laid out in guidance?

Jim Connor

I think we're pretty much right on, we might be pushed back slightly from what we said in the first quarter, but there is no significant reason for it, just timing of marketing, but I think everything is on track. Obviously, our FFO guidance considers all that, considers the timing.

And again, we're on track with funding the development pipeline and I think again a lot of that’s going to be funded with the disposition proceeds as we go throughout the year.

Kevin Baron - Citi

Okay. Thank you.

Operator

Next, we'll got Blaine Heck. Please go ahead.

Blaine Heck - Wells Fargo Securities

Hey guys just a follow-up on that, can you give maybe a little more color on any packages you have for sale at this point, where they are and what are their set type?

Jim Connor

Well again I think as far as asset type goes we’ve said, we're mainly selling the office products in certain target markets. I think the one asset I would specifically mention that I think has been out in the press is the 3630, [Pete] Street building and bucket in Atlanta. We are now at the point where we're getting pretty close to selecting of fire for that property and we’ll be moving quickly towards the contract on that. So that’s one of the projects we anticipate closing probably late second quarter.

Other than that it’s just a few different projects that are out there and I only want to comment on any specifically, but we're currently far down the road with several of the planned dispositions.

Blaine Heck - Wells Fargo Securities

Okay. Fair enough. And then Mark can you give us a sense of what the impact of the higher than usual snow removal and utilities expense was on same-store?

Mark Denien

Yes, Blaine. It was approximately about 60 to 70 basis points impact on the quarterly number, obviously less than that on the rolling 12 month number more like 20 basis points and then all IN from a dollar now perspective on bottom line FFO, it was just over the million dollars. So nothing too significant that we can’t recover from for the rest of the year, but it did have an impact on the percentage growth for the current quarter.

Blaine Heck - Wells Fargo Securities

All right great thanks.

Operator

And we’ll go to Vance Edelson. Please go ahead.

Vance Edelson - Morgan Stanley

Great thanks. So, you mentioned pushing rents on the industrial side. Sounds like you have a real opportunity here given the pricing power that's kicked in. How much do you take advantage of that by raising rents even more, perhaps, at the expense of further occupancy gains? In other words, how do you balance the pricing versus the ultimate occupancy that you'd like to see?

Denny Oklak

Well I think that’s more art than science, we do a pretty good job of tracking the deals and when they originally signed as we’ve talked before we’re now very focused on the leases that were signed between 2009 and 2011, when we think we were really at the trough in the overall market. And we have about 45% of the leases that roll in the next 18 months fall into that category.

So we’re targeting pushing rents there extremely hard. Most of our industrial portfolio is across the country are 95% or better so they have all of the leverage that they need to go out and push rents and they are not the lease that uncomfortable we’re taking on a little bit of vacancy given the strength of the market. So, that’s the process and I think we’re pretty proud of results in the first quarter that our guys have achieved.

Vance Edelson - Morgan Stanley

Okay. That’s helpful. And then as my follow-up, you mentioned that the strong capital liquidity out there might encourage you to sell more on the office side. Does it make you any more likely to monetize some of the medical office buildings, or are you pretty happy with everything you have there?

Denny Oklak

We’re pretty happy with everything we have there. There is still one building from the portfolio that we closed on at the end of the -- mostly at the end of the fourth quarter of last year that’s still hanging in limbo that should will likely I think close this quarter, but other than that’s it, so just one other property out there.

Vance Edelson - Morgan Stanley

Okay, great. Thank you.

Operator

Our next question is from Jaime Feldman. Please go ahead.

Jamie Feldman - BofA Merrill Lynch

Great, thanks everyone. This earnings season has been an increasing amount of concern over warehouse supply. Can you guys talk about where you think we are in the cycle, when you start to see some downward pressure on rents and which markets you think at this point are closest to being a concern versus those that really have a long way to go before we should even start this discussion?

Denny Oklak

Yeah, thanks Jaime. I think if you look at the macro numbers have been drilled down into all of these specific markets that we operate in. Demand still outpacing supply, we focused a lot and I share with the group some of the speculative delve with numbers, those are the one that obviously concern us most. I would tell you that we still believe that the vast majority of the markets and the country in general are in balance. There is a couple of that makes and pretty significant moves, the Inland Empire in Houston continue to lead the country with the amount of the spec space, but quite candidly those two markets have done a great job over the last six quarters of keeping those thus the amount of spec space that is under construction North of 30% pre lease. So a lot of good activity in those markets, a lot of good net absorption.

The one that jumped that pretty big this quarter, that's got someone watch this Dallas. Dallas added about 6.5 million square feet of spec space, there percentage of lease is down just under 10%. So that's probably one that we've got a watch, but in addition to that there is probably still five major markets around the country that haven’t started any spec development a lot of them that are 40% and 50%. So on far, we're still in pretty good shape, we'll continue to monitor throughout 14 and 15 and see what the effect is.

Jamie Feldman - BofA Merrill Lynch

And then along those lines, how fast do you think the warehouse cycle can turn? And is it a six-month, is it nine months, is it several years? And what's different this cycle versus prior cycles that maybe won't happen as fast or maybe happens even faster?

Denny Oklak

Well first and foremost I think we all remember how tough the five years, four or five years of recession were, so lot of it is going to depend on self control, clearly there is a great deal of capital and they are chasing industrial development today and that has worked its way into the speculated development pipeline, but most of the market are in check, it doesn’t take very long for aspec project is still on the show for those 8% under written yields to deteriorate, so most people are still very cautious that’s why we are very please with the 86.5% lease of our underdevelopment portfolio, we’ve got a few spec projects out there but build to see pipeline strong as it is that’s where the majority of our focus is and we see a lot of value creation there.

Mark Denien

And I would add a couple things to that, as I think, I said this before it was things we are seeing and industrial space is, with GDP growth and the 2% to 2.5% range a lot of our customers can take the time and do build suite in six to nine months. We see requesting us to accelerate the construction with they are so doing build to suits which that sort of changes if GDP growth jump up into the 4.5% and 5% range and we just haven’t seen that yet.

And I think the second thing on the industrial side that we are seeing is a real and everybody is aware this it’s just the growth in the ecommerce space. So I think that as Jim said in his remarks, I think we've still, we've got, I think a lot going forward there in our portfolio, but also just and a industry as a whole, because that, I think no matter what happens with the overall economy, that's going to continue to grow.

Jamie Feldman - BofA Merrill Lynch

But do you think the capital is different now, like are we still, I know early this cycle the discussion was that, you needed equity to build and very few merchant builders to get out there, it seems like that's change.

Jim Connor

I think there is always capital.

Jamie Feldman - BofA Merrill Lynch

Okay, alright. Thank you.

Operator

And next we'll go to Eric Frankel. Please go ahead

Eric Frankel - Green Street Advisors

Thank you. Mark did you guys purchased preferred this quarter?

Mark Denien

Yes, Eric we had basically reverse inquiry and took down about $19 million space of preferreds for about $18 million. So saved about a $1 million, had about a $1 million gain before writing off the original cost. So the all in effective yield on that was about 7%. So, thought that was an attractive transaction.

Eric Frankel - Green Street Advisors

Okay. And then Jim maybe this is for you. Can you comment about the positioning of land bank and where it's is located, where the spec development is taking place and if it isn't located in markets where there is a lot spec development, how can you price build-to-suits relative to where spec wants to lease today?

Jim Connor

Let me see if I can follow the question.

Eric Frankel - Green Street Advisors

I can clarify, if you'd like.

Jim Connor

You want to know where are better land holdings are is that the first part?

Eric Frankel - Green Street Advisors

The majority of land holdings, yes. On a book value basis.

Jim Connor

I would tell you with the exception of Southern California and the Northeast, we've got strategic land in most all of our office and quite candidly we sold those inventories down selling off non-strategic and as we started to ramp-up development in as you know for the last few quarters, we’ve acquired very little land, in the last few years, so as we continue to work that inventory down.

We’ve got great land and remember we didn’t impair that land, the land that’s held for development, the last go round so those are really true yields on the build-to-suits that you see indicative of our original investment in the land.

Eric Frankel - Green Street Advisors

And your pricing build-to-suits, I mean, are the rate that you are charging comparable to spec development are they lower or they higher, I’m just trying to get a sense?

Denny Oklak

No, I think we believe the rental rates that we are charging and the yields that we are achieving are appropriate risk adjusted returns, or for build-to-suits versus spec. And given our success in the market place in the yields, as we said we’ve got a stabilized yield of 7.6% on that under development pipeline, which we all know, where cap rates are today that’s a tremendous amount of value creation and those projects we're seeing, those are all over the country.

All different product type so, that’s combination of again we're pretty good to build-to-suit business we’ve got our own construction, company so we are still getting great pricing and we’ve got the right land sites.

Eric Frankel - Green Street Advisors

Okay. I’ll jump back in the queue. Thank you.

Denny Oklak

Thanks Eric.

Operator

And we’ll go to Paul Adornato. Please go ahead.

Paul Adornato - BMO Capital Markets

Thanks very much. With respect to capital recycling over the last couple of years, there has been some questions or suggestions that maybe the medical office might be right for disposition in some form or another. And so my question is, have you given any thought to a potential spin-off of these assets since the spin-off of other entities has kind of gained some traction within the REIT space and that would of course solve the capital redeployment problem?

Denny Oklak

Well Paul, we really haven’t giving it a lot of thought. I guess what I would say is we as you all know, you know and everybody knows from what we’ve been saying is we really like the business, we think it’s a good growth business for us. Today it’s a significant piece of our business, particularly on the development side but overall, it’s still only about 14% or 15% of our business today. One thing we did do is look at that portfolio from a strategic point of view last year and as you know, we sold including the couple of that closed here in the first quarter in January, we sold about $250 million of that portfolio. So in our mind, we’ve really recycled some and generated some very nice gains out of that portfolio. And we’re going to continue to move forward on the development side in that business.

For us as we continue to really sell some of the suburban office, it’s again another great place for us to redeploy that capital back into the development pipeline in MOBs.

Paul Adornato - BMO Capital Markets

Okay, great. Thank you.

Operator

Next we go to (inaudible). Please go ahead.

Unidentified Analyst

Hi. Can you hear me?

Denny Oklak

Yes.

Unidentified Analyst

Okay. You made a comment earlier on your opening remarks about it’s a healthy supply of maybe built-to-suit or spec deals you’re looking at to replenish your pipeline as you continue to complete your development. I was wondering if you could give a little color around, is there a change in future yields based on the kind of projects that are in the pipeline and is 600 million roughly the number, we should expect to be at on a longer term basis?

Denny Oklak

Well, I'll address the first question from yield perspective. There is always competitive pressures in the marketplace. But as with the deals we've reported and everything in our price -- everything that's in our pipeline. we feel very comfortable with where are pricing is today. One of the things and ties back into the speculative development that one of the reasons we're monitoring it so closely, it's for just back to monitor markets where they potentially could get overbuilt and you'll see pricing pressures, downward pricing pressure on build-to-suits, as there are more opportunities in the marketplace. So we don't see that today, but that’s obviously concern out there in the future that we're all monitoring pretty closely.

Jim Connor

And as far as the level of the pipeline, I’d just had a couple of things. [Kevin] We started about 660 million of projects last year, our guidance was sort of 350 to 450 this year. So I think you're going to see that the pipeline under development be roughly in that $600 million range give or take. The only thing that might affect that, I would say on the upper side would be some of the projects that we're doing today on both the industrial and the MOB side and then occasional office build-to-suits tend to be larger projects. So if you land a couple of the bigger 1 million plus square foot warehouses or 150,000 square foot, medical office building that pipeline might go up a little bit with those kind of projects there.

Unidentified Analyst

Okay, and on very quick kind of accounting question, I just want to double check, your same-store NOI is purely based -- is on a commencement basis right, it’s not on a sign basis, is that correct?

Mark Denien

Yes, that’s correct.

Unidentified Analyst

So, if I look at your, like page 18, some upside in leasing like in medical office up 200 basis points or so that’s not in your same-store NOI that was reported this quarter, correct?

Mark Denien

No, our same-store NOI is on a cash basis, so basically it’s tenant paying rent and the occupancy figures on previous pages were on a lease sale basis.

Unidentified Analyst

Okay, thank you.

Mark Denien

Yes.

Operator

Our next question is from Dave Rodgers. Please go ahead.

Dave Rodgers - Robert W Baird

Yes. Mark, could you give us a little bit of color on where you think current liquidity is and funding sources for the year, do you comfortable funding off the balance sheet? And then maybe give us a little run down on kind of the trend in coverage and leverage metrics as you move throughout the year?

Mark Denien

Yes, sure Dave. We are basically projecting that we can cover all of our cash needs for the year with our disposition pipeline that Denny mentioned. From a acquisition perspective, I think our guidance’s top end was about $200 million and development pipeline at 450 even at those levels, we should be able fund all that with the dispositions that we have coming out late second and early third and a few striking late in the year. So really no needs for capital. And then as far as cost like I guess, I would say from a debt perspective, since we really don’t have anything to do this year, we’re really out till early next year with the next big debt maturity. And I think that’s about a 7.5% coupon rate.

And today our 10 year borrowing rates sit probably closer to 4.25 give or take. So, I think that you won’t see us needing to issue any kind of new debt or equity to cover our events. Our leverage profile should continue to improve. It's always a little lower in the first quarter on a coverage basis, partially because it’s some of those higher G&A costs and things like that that I mentioned.

As we get into the year and the development pipeline comes on line and our G&A costs normalized, you will continue to see those leverage metrics get better every quarter as we go through the rest of the year, just based on placing everything in service and just kind of normal blocking and tackling without any big capital transaction.

Dave Rodgers - Robert W Baird

Great. And one follow or maybe two follow ups, I'll put them together. The first is speculative construction projects relative to the overall pipeline. Do you have a comfort level, I didn't hear if you address that, if you did, I apologize. And in the second, can you address kind of development costs to maybe ex-land or what you're seeing on that side Jim?

Jim Connor

Yes, we're comfortable where we're running now. One of the challenges we have with as many of our markets that are above 95% occupancy as we have, we have a lot of people in the field that would like to do to spec developments. But with as many good build-to-suit opportunities, we're focused on keeping that percentage lease of the development pipeline in the range that we kept it.

So, you will not, I don't think you'll see us, ramp up spec development, in order to beat our development goals. I don't think we'll have to do that. So, we'll keep it at the modest end of the spectrum.

And from a cost perspective, there has been a lot of numbers been around that construction costs are moving up into the 3%, 4% 5% range. I will tell you here at the very low end of that range. I would tell you that across the country our numbers are in that 1% to 3% range. But I think that's the direct result of having our own construction company. So, we're not having to flight competitive pricing with the GCs out there who are seeing the increase in demand enable to push their margins, we’ve got our own guys, so we're getting good pricing and be able to hold the line on material cost pretty well.

Dave Rodgers - Robert W Baird

Great thank you.

Operator

We’ll go to Michael Salinsky. Please go ahead.

Michael Salinsky - RBC Capital Markets

Good afternoon. On the industrial side, the moving pieces during the quarter, ended the quarter pretty well occupied; any vacate during that we should know about over the balance of the year that would create some choppiness in occupancy?

Denny Oklak

I would tell you, we don’t have any big surprises around certainties out there for the balance of the year on the industrial portfolio and big, I mean 300,000 to 500,000 square feet, we’ve got all those addressed and baked into the numbers. And quite candidly, we were very pleased in the first quarter to backfill a couple of those that we knew were leaving down in Atlanta and Savanna as quickly as we did.

Michael Salinsky - RBC Capital Markets

Okay. And then this is my follow-up question, given the opportunities on the preferred retirement during the quarter, as well as a strong bid you are seeing for the office MOB and industrial assets, any thoughts on maybe advancing that selling a little bit and retiring some of those preferred just given the coupon on that?

Denny Oklak

Yes, Mike, we would certainly entertain that. I think if -- a lot of its timing, right, I mean if we have the disposition pipeline accelerate a little quicker than we think right now and we’ve got the money suiting around, we would potentially look at the redemption. The one thing that was great about the transaction, we did do like I mentioned, it was a reverse enquiry. So we are able to take that down at very favorable pricing at 7% effective rate rather than give or take 6.6%, so it is something, we look at, but right now we do have a little bit outstanding on our line, we want to get that taken care of first to make sure we have all of our best covered on the development funding. Once we get that done if we had excess proceeds we would look at something like that.

Michael Salinsky - RBC Capital Markets

Thank you.

Operator

And we’ll go to Blaine Heck. Please go ahead.

Blaine Heck - Wells Fargo Securities

Thanks. So, there are some very sizeable industrial portfolios that are on the market or going to be coming to market. Is that anything you guys would be interested in pursuing at this point and if so how would you think about funding something like that?

Denny Oklak

Well I alluded to it, I mentioned it in the remarks that things are pretty pricy right now and there are some I would say some portfolios out there that are float around some are good and some maybe not quite so good, but I think it’s going to be tough for us to decide to do any large portfolio transaction here in the near future which is we are pricing as right now. So I wouldn’t speculate I guess then Blaine how we would finance it, but I don’t really think it’s going to happen.

Blaine Heck - Wells Fargo

Sure, fair enough. Thanks.

Operator

(Operator Instructions). And we’ll go to Eric Frankel. Please go ahead.

Eric Frankel - Green Street Advisors

Thank you. Just I guess add on to Blaine’s question if industrial pricing is getting so aggressive is there a thought of you may be selling some of your industrial portfolio, is there something to fund higher yielding or better more value creation in your development pipeline?

Denny Oklak

Well, you noticed in the first quarter we sold some of our flex properties in Indianapolis. I think we’ll continue to monitor in the industrial portfolio some sale of some of our smaller product type in all of our markets or in any of our markets I guess. And I would say, what's fueling that right now is we are starting to see more people interested in that product type. So generally pricing is a little better right now than it makes may have been.

So if you continue to see that, but as you know we're very pleased with the quality of our overall portfolio and some of statistics that we show in our regular presentations reflect that. So we really have no desire today to sale any of that newer model involved, because again we think we've got opportunities to keep driving or estimate for portfolio.

Eric Frankel - Green Street Advisors

Okay. Well, I'm just wondering if there is price for you are a taker?

Denny Oklak

Well, (inaudible) an offer, Eric.

Eric Frankel - Green Street Advisors

Fair enough. I guess final question is on suburban office. Are there any movement you guys recognize obviously pretreated special example, I'm just kind of curious on some of the other suburban offices you probably than (inaudible) next year or two more activity is there?

Jim Connor

Well, I would say that we're pretty pleased with pricing we are seeing. We were pleased with pricing we saw on some of that portfolio we moved later last year and still again have a couple of portfolios out there allow some individual assets. So we're pretty pleased the (inaudible) we are picking up in the suburban office assets. And I would also say the financing markets remained very favorable so that's also helping support the pricing.

Eric Frankel - Green Street Advisors

Okay. Thank you.

Operator

And we'll move to Jaime Feldman. Please go ahead.

Jamie Feldman - BofA Merrill Lynch

Great, thanks. So can you guys talk about whether you’ve seen any incremental shift in improving conditions in any of your office markets this quarter specifically? So I guess what I am asking is we know the recovery has been kind of slow and steady moving from market to market. What other markets this quarter that have improved that maybe caught you guys off guard or give you hope for the future?

Denny Oklak

I don’t know that I can point to specific markets, one of the things, one of the trends we are seeing that’s really started in the last quarter which we take as a positive sign, is you’re starting to see buyers a little more comfortable and a little bit more interested in a little more vacancy. I wouldn’t say a lot of vacancy in but 2012 and 13 we were pushing to get occupancies in buildings that we are going to sell above 90% really focus on the roll in the next 36 months. And now we are seeing buyers that are interested in buildings that have occupancies in 80% to 85% range because they believe in the improving economics of the cycle and they are willing to underwrite that a little bit more aggressively. So for us that is opened up some opportunities to sell from additional building that haven’t quite gotten leasing up to 90% and not have to incur the cost of doing so.

So that’s probably the most positive trend that I think we have seen.

Jamie Feldman - BofA Merrill Lynch

And then what about just on the tenant demand side for space?

Denny Oklak

It continues to be kind of consistent with the last couple of quarters, we still are seeing the financial services companies, the insurance companies healthcare companies, healthcare related and servicing companies have all been good, good consumers of space. A lot of the deals that we have rolling in our own portfolio, it’s not uncommon to, we're renewing those users and expanding them at the same time. So, that's been a pleasant trend that we've been seeing for the last 6 months to 9 months.

Jamie Feldman - BofA Merrill Lynch

And then there is no market this quarter that picked up from that trend like versus the last quarter or it's just going to consistent?

Jim Connor

I can't point to any one that comes to mind, I don't if Denny…

Denny Oklak

Well, I think we've seen some good activity in St. Louis, Jim mentioned in the remarks, we signed a big lease over there. I think generally activity is picked up there, a little bit in Cincinnati too I mean the rest of the markets they all very solid. We're in the low to mid 90s in all those markets, all those other markets right now.

So, those markets are doing fine and we're starting to see a little pickup in a couple of these other markets.

Jamie Feldman - BofA Merrill Lynch

Okay, alright. Thank you.

Operator

And to the presenters, there are no further questions in queue.

Ron Hubbard

Thanks John. I’d like to thank everyone for joining the call today. We look forward to seeing many of you at the NAREIT Conference in June in little over a month or if not, we’ll reconvene during our second quarter call, tentatively scheduled for July 31. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Duke Realty's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts