Duke Realty's (DRE) CEO James Connor on Q4 2015 Results - Earnings Call Transcript

| About: Duke Realty (DRE)

Duke Realty Corp. (NYSE:DRE)

Q4 2015 Earnings Conference Call

January 28, 2016 3:00 PM ET

Executives

Ronald Hubbard - Vice President of Investor Relations

Denny Oklak - Executive Chairman

James Connor - President, Chief Executive Officer and Director

Mark Denien - Executive Vice President and Chief Financial Officer

Analysts

Juan Sanabria - Bank of America Merrill Lynch

David Toti - Cantor Fitzgerald

Jeremy Metz - UBS Global Research

Ki Bin Kim - SunTrust Robinson Humphrey

Eric Frankel - Green Street Advisors

David Rodgers - Robert W. Baird & Company

John Guinee - Stifel Nicolaus

Brendan Maiorana - Wells Fargo Securities, LLC

Michael Bilerman - Citigroup

Operator

Ladies and gentlemen, thank you for standing by. My apologies here for any inconvenience. Once again, welcome to the Duke Realty Fourth Quarter Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. And later there will be an opportunity for questions and answers with instructions given at that time. [Operator Instructions] And as a reminder, your conference call is being recorded.

I’d now like to turn the conference call over to your host, Vice President of Investor Relations, Ron Hubbard. Please go ahead.

Ronald Hubbard

Thank you. Good afternoon, everyone and welcome to our fourth quarter and year end 2015 earnings call. Joining me today are Jim Connor, President and CEO and Mark Denien, Chief Financial Officer.

Before we make our prepared remarks, let me remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you to our December 31, 2014, 10-K that we have on file with the SEC.

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

James Connor

Thank you, Ron and good afternoon everybody. Let me start off by saying that’s why we are not in the telecommunications business and we are in the real estate business. But now we will get started. Let me start off by saying that 2015 was another excellent year for Duke Realty. We exceeded all of our beginning of the year goal and capped the year off with an excellent fourth quarter.

Let me recap our outstanding year. We signed nearly 22 million square foot of leases, which we believe is especially impressive given our all time high occupancy levels. We improved in-service occupancy to an all time record high of 96.1%, which is up from 95.4% at prior year end. And we grew same property NOI at 4.7% and grew rents on renewal leases by 12%.

We commenced $684 million in new development starts and completed $1.8 billion in property dispositions, substantially reducing our office exposure to 8% of our NOI. We sold $132 million of non-strategic land and monetized another $93 million through our development activities.

In total, we recycled the almost $1 billion of proceeds to fund our development needs for the year and payoff over $1 billion of debt to significantly delever the balance sheet. All are growing AFFO per share about 5.2%. Finally, we raised our regular quarterly common dividend by 5.9% in light of the stronger balance sheet and low payout ratio. We also paid a $0.20 per share special dividend in December.

I’ll now touch a bit on our leasing development activity from the fourth quarter. We had a very good quarter in leasing with over 6.7 million square feet executed and also commenced $238 million of new development starts. One of our notable leases includes the 783,000 square foot lease executed on our speculative development in the Inland Empire that is just completed in the fourth quarter.

This leads with the new customer which happens to be one of the world’s largest online only home furnishings retailers. This is another example of our expertise and commitment to be in the nations leading e-commerce real estate solutions provider. I would like note that in year-end all but four of our 22 industrial markets were 95% lease or higher on an in-service basis, with an overall in-service occupancy level for our industrial portfolio of 96.5%.

Our medical office portfolio continues to produce strong results ending the year with in-service occupancy at 95.5%, that’s 120 basis point improvement over year-end 2014 and tenant retention rate for the full-year is 86%. As we stated before the low volatility and growing NOI nature of this portfolio should contribute to a better risk adjusted earning stream for the overall company.

Turning to development for the fourth quarter, we started $238 million of development projects across seven deals. We signed three 100% pre-leased industrial developments, totaling 1.4 million square feet with the largest being a 1 million square foot facility for Amazon in Columbus, Ohio. The Amazon deals for term of 15 years and is a joint venture in our Rickenbacker Intermodal Park.

We also begin two speculative industrial developments during the quarter, one for 403,000 square feet in Chicago and the other for 490,000 square feet in our Northern New Jersey. Both of these submarkets have vacancy rates in the 5% to 6% range with a strong demand outlook for the year and we already have the solid list of prospects.

On the medical side, we started two on-campus facilities, totaling 158,000 square feet in aggregate which were combined to 75% pre-leased. Including the solid fourth quarter activity, our development pipeline at year-end is over $665 million with a weighted average stabilized initial cash yield of 6.9% and it’s expected to generate a GAAP yields of 7.5%. This will produce margins consistent with our historical 18% to 20% range. The aggregate pre-leasing level is 58% which is up a bit from previous quarters as expected.

I’ll now turn it over to Mark to discuss our financial results and our capital plans.

Mark Denien

Thanks, Jim. Good afternoon everyone. I am pleased to report the core FFO for the quarter was $0.29 per share compared to $0.30 per share in the fourth quarter of 2014. Core FFO for the quarter when compared to the fourth quarter of 2014 was impacted by 2015 disposition activity. Improved operational performance partially offset the impact of these dispositions.

We reported core FFO of $1.17 per share for the full-year 2015, compared to $1.18 per share for 2014. Core FFO was impacted by lower income from service operations in 2015 as a result of a decrease focus on third-party construction projects and lower income from joint venture management. The lost FFO from 2015 dispositions was substantially offset by the impact of deleveraging, improved operational performance, and incremental NOI from new development project deliveries.

I am very pleased to report AFFO of $1.01 per share for the full-year 2015 and $0.24 per share for the fourth quarter. 2015 AFFO represents a 5.2% growth rate over 2014, which is impressive given the level of dispositions and deleveraging for the year. AFFO for the full-year 2015 translates into a payout ratio of 68%. Looking forward we expect to be able to continue to grow AFFO per share and we’ll evaluate our dividend to maintain a conservative AFFO payout ratio in the 65% to 75% range.

I would like to take a moment to address a joint venture related land impairment charge that is not included in our core FFO. During the fourth quarter we made a decision that we would actively seek to exit our retail joint venture in Linden, New Jersey. We have previously bought 57 acres of industrial land from this joint venture on which we have developed over 1.1 million square feet of modern bulk industrial product.

Retail development on remaining land in this joint venture has been held up for several years due to ongoing zoning and land used litigation. The decision to exit this joint venture triggered a $19.5 million impairment charge this is included in our GAAP losses from joint ventures and also in our core FFO adjustment of $35 million of land impairment charges recognized during the quarter.

The remaining land impairment charges relate to some office parcels, both on balance sheet and in joint ventures that were either sold in the fourth quarter or expected to be sold in early 2016. Overall, we had another solid quarter from an operational standpoint and now I will quickly recap capital activities for the quarter. We utilize the disposition proceeds generated during 2015 to fund our development pipeline as well as to reduce leverage.

As discussed last quarter we also used a portion of 2015 disposition proceeds to pay a special dividend of $0.20 per share in December. As previously announced in October we repaid a $150 million of 5.5% unsecured notes that had an original maturity date of March 2016. We believe that this transaction was an excellent use of available cash and help to further improve our key leverage metrics.

For the full-year 2015 we repaid $831 million of unsecured notes and $231 million of secured debt. Our expectation is for another strong year of net dispositions in 2016. The proceeds of which will be used to fund our development pipeline and for 2016 debt maturities, which will help us to deleverage further. The level of plan dispositions in 2016 may result in another relatively minor special dividend for 2016.

Combining the additional capital we anticipate generating in 2016 and with the significant improvements we’ve already made to the balance sheet in 2015. We are well-positioned to continue to improve our leverage metrics this year. I am very pleased to announce some very good external news regarding this balance sheet progress.

Just last week both Moody’s and Standard & Poor's raised our credit outlook to positive from stable and maintained our credit ratings at Baa2 and BBB respectively. We are optimistic that further improvement in operations and deleveraging will propel us to a high BBB credit rating in the not-too-distant future.

Now I will turn the call back over to Jim.

James Connor

Thanks, Mark. Yesterday, we announced a range for 2016 core FFO per share of a $1.15 to $1.21 with a midpoint of a $1.18 and AFFO per share of $1.02 to $1.08 a share with a midpoint of $1.05. In addition we are also introducing a range for NAREIT-defined FFO per share of a $1.12 to $1.24 with a midpoint per share of a $1.18.

First from a macro outlook perspective we expect the economic environment in 2016 to continue at about its current pace, yet with a bit more volatility and possibly some downside if the recent turmoil continues with uncertainty about China and the impact of oil prices. We are however a bit more optimistic on continued favorable industrial supply demand fundamentals that can support rent growth and new development starts.

For 2015, U.S. industrial demand outpaced supply by over 90 million square feet. Nationwide availabilities continue to fall and are at all-time lows for the modern industrial era. Assuming the markets reached supply demand equilibrium in late 2016 or early 2017, we still see opportunity for rent growth, albeit at slower levels than the past few years.

This is particularly evident given e-commerce tailwinds, a positive outlook on consumer spending and our strong track record of executing strategic development projects across our nationwide platform. As we anticipate having virtually exited the suburban office business by the end of 2016, we are providing our guidance on operational metrics such as occupancy and same-store property growth on industrial and medical office assets only.

We believe this is the best way to think about and model the Company on a go forward basis. And this is how we plan to report actual results beginning in the first quarter. A few specifics on some of the anticipated key performance metrics outlined in the 2016 range of estimates page provided in the back of our supplemental package and on our website are as follows.

Our average in-service occupancy range for the industrial and MOB on a combined basis for 2016 is expected to be 95.4% to 96.4%. I would point out that we do expect the in-service occupancy in the first quarter to drop from current levels, due mainly to spec development projects coming online along with the typical first quarter decline due to seasonal industrial expirations and contractions.

Same-property NOI for industrial and MOB on a combined basis is projected to grow at a range of 2.75% to 4.25% which is based on steady occupancy and continued rental rate growth and embedded lease escalations.

On the capital recycling front, we expect proceeds from building dispositions in the range of $600 million to $900 million and proceeds from land dispositions of another $20 million to $60 million. These dispositions include nearly all of our remaining office portfolio, consistent with an exhibit we published in our November 2015 investor presentation.

The results should be that our office exposure will be in the very low single-digit percentage of our NOI by year end. I will also reiterate that while these dispositions will be diluted to FFO, we expect the capital recycling to generate positive AFFO growth. Acquisitions are projected in the range of zero to $50 million. We expect to continue to be very selective given today’s pricing environment.

Development starts are projected in the range of $400 million to $600 million and above 50% preleased. We expect to fund our development pipeline with proceeds from our building and land dispositions. Service operations should be in the range of $8 million to $12 million below our 2015 run rate as we continue to emphasize on balance sheet development over third-party work and a continued decline in fees from joint ventures as we continue to reduce our investment in these joint ventures.

We would also like to introduce financial credit metric expectations for the first time, all measured on a year-end or fourth quarter run rate basis as follows. Effective leverage, measured on a book basis, is projected to continue to decrease and finish the year in a range of 38% to 42% highlighted by the expected repayment of roughly $330 million of secured debt in the May timeframe, sourced from disposition proceeds as noted above.

Fixed charge coverage is projected to increase to 3.3 to 3.6 times on a fourth quarter 2016 run rate basis. And net debt-to-EBITDA is projected to range between 5.6 and 6 times on a fourth quarter 2016 run rate basis.

Now, before we open up the line, I would like to acknowledge our entire Duke Realty team for their efforts producing another great year of execution on our real estate operations and capital recycling. Our collective actions are producing reliable steady cash flow growth for our shareholders.

I would also like to give special thanks to our outgoing CEO and now Executive Chairman, Denny Oklak for his 29 years of service and 12 years of leadership as the CEO at Duke Realty. Denny has not only left an indelible mark on what is a leading first class corporate culture here, he mentored and personally touched many of us here at Duke Realty in ways that words can’t describe.

And what many of you listening in can appreciate, Denny also left his mark as one of the pioneers in industry group leaders since the dawn of the modern REIT industry from the mid-1990s. Going forward, all of us here at Duke Realty look forward to carrying on the culture and strategic direction that the leadership under Denny has practiced, a formula that we firmly believe will continue to drive shareholder outperformance.

And now, we will open up the lines for some questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question will come from the line of Juan Sanabria. Please go ahead.

Juan Sanabria

Hi, good afternoon, guys. Thanks for letting me have some time. For the dispositions, what are you guys thinking in terms of cap rates? If you could give us a little more color on what markets, in the office market in particular, you're looking to exit and any bias you're thinking about in terms of when the sales will actually be executed?

James Connor

Well, Juan let me start off and then I’ll let Mark to add a little bit of color. I would tell you as we’ve looked in our projected budget in detail. I think you’ll see the cap rates average in the mid-5s. Those will range from low in the 5s. What I said?

Juan Sanabria

You said mid-5 that would be pretty good.

James Connor

That would be pretty good, mid-7s, at the low end - sorry about that. On the low end we will have asset, the number of our high-end assets that will be sold in the mid-to-low-5s and some of our lesser quality assets with cap rate as high as in 9% or perhaps 10%. So on average we are looking in the mid-7s.

Mark Denien

Yes, as far as timing Juan, I think you will see – we’ve already closed on some that kind of spilled over from 2015 and 2016, but on balance I think it will happen fairly evenly during the year. So that would suggest our $150 million to $200 million give or take for quarter on average.

Juan Sanabria

And just is your bias to be towards the high end of the disposition range? And what markets will be left in the office pool?

James Connor

Well, today as we detailed in most of our investor conferences in the fourth quarter, the largest single ownership is in Indianapolis. And we started disposing of Indianapolis office assets in the fourth quarter with a two-building package. And we’re in the process of looking at and evaluating how is the market, the balance of the portfolio throughout the year.

So Indianapolis is the largest single concentration and then from there its really selling mostly one-off asset some of which are joint venture assets, some of which are wholly-owned that are around the country, some of which we have been working to stabilize, some of which we’ve been waiting for debt to expire. So it’s a combination of reasons, how they have ended up the bottom of list, that’s kind of the overview.

Juan Sanabria

Okay, great. And then on the demand side for bulk, have you guys seen any softening across any of your key industries or tenants or geographies that is either on the developments or just regular course leasing that is an area of concern or something you are watching? Obviously, Mark is a bit skittish on whether we get a recession or not.

James Connor

Juan, I don’t think any of our local operating teams have reported that or can point to any weakening sectors, most of our concern I would tell you is geographically based where we are following the supply and demand balance. We’ve reported last quarter that and I think many of us share, a little bit concerned about Houston. We have less of that concern and probably our peers in the office and the apartment side, but yet we are watching that closely.

And I think several of us have alluded to the supply side in Dallas. There is a lot of product on the market in Dallas. They had a phenomenal year in terms of absorption and all-time high, but there is a lot of product available down there. Beyond that we see the markets in great balance and really good demand from our customer base.

Juan Sanabria

Great and just one last quick one. Have you guys seen any impact to MOB cap rates in the transaction market just given the cost of capital issues with some of the healthcare-focused REITs?

James Connor

No, we have not been the sellers of MOB since 2013 and 2014 when we clean up the portfolio. We are still seeing very strong and growing demand by the hospitals and healthcare systems and we’ve seen no impact on yields and projected cap rates from any of the interest effect.

Juan Sanabria

Thanks guys.

Operator

And we will next go to the line of David Toti. Your line is open.

David Toti

Hey good afternoon, guys. Just quickly, a couple of high-level questions. First, with regard to some of the conversations you have had with your MOB tenants, is there any hesitation in front of the election, any expectation for structural change in healthcare that could impact the MOB development, the structural development as we've seen it the last couple of years? Anything from the conversations of note that might be shifting?

James Connor

No, David, I would tell you, in fact, it’s exactly the opposite. Most of the major hospitals and healthcare systems particularly those that we do business with who are financially very strong, are continuing their very strong capital investment programs across the system. So our pipeline for MOB has probably never been healthier in terms of projects and opportunities with not only our existing client base, but new client base, and that is affording us opportunities for some geographic expansion, which has always been a goal of ours in the MOB portfolio.

David Toti

Okay, that's helpful. Then just one other question. One of your peers mentioned on the call earlier this week that they expected to see some value deterioration in industrial assets, potentially in secondary and tertiary markets, so where the fundamentals weren't as strong as the landscape or as fundamentals in the industrial space plateaued. Do you have the same expectation going into 2016, 2017? It sounds like from your opening remarks that you expect sort of a plateau as well. Would you also expect value shifts in a similar fashion?

James Connor

While I anticipate more of a plateau, I don’t anticipate any yield or margin erosion in 2016. I think the earliest that we would be concerned about that might be 2017 when some of the supply and demand side markets reach equilibrium. We are not anticipating cap rates to move north dramatically.

The amount of capital that out there, the introduction to foreign capital and sovereign wealth funds making big acquisitions in the industrial side. We think its going to continue to keep cap rate pressure down where it is. So I would tell you, no I don’t see erosion. I think they will stay flat for the year, we will see how 2017 shapes up.

Operator

We will next go to the line of Jeremy Metz. Your line is open.

Jeremy Metz

Hi, I was just wondering; in terms of the same-store guidance of 2.75% to 4.25%, can you just break that down for us? How it looks between the industrial and then for the MOBs and maybe what's baked into guidance for rent spreads in 2016?

Mark Denien

Yes, Jeremy its Mark. I think industrial MOB will be probably pretty close together so I would think each of them will be at the midpoint in close to the mid-3s. As far as rental rate guidance, we are still projecting double-digit rental growth on all of our industrial deals that we’re doing; we’re about 14% in the fourth quarter.

We’ve mentioned this before, we track all leases that we have coming at us for the next 12 to 18 months and out of all those leases looking out over those next 18 months about a third of them were still - are still left that were signed in that 2009 to 2011 time period. So we really want to try to puts rents really hard on those up into the maybe the high-teens and then the other on balance, will get us down in the – still we think the low double digit for rent growth on industrial.

Jeremy Metz

Okay, appreciate that. Then a quick one on G&A. You're obviously calling for it to be relatively flat here, so just wondering later in the year, as you finish cycling out of the rest of the suburban office sales, is this something we should see trend lower from here and into 2017?

Mark Denien

No, I think you will see our G&A load still fairly flat I mean I think we done a good job of reducing expenses over the years as we moved out of that product type. But I am not sure that we can get anymore efficient than we already are. Obviously there will be overhead changes whether it be additions or deductions, but I think that will be driven all the way down to the property level. So those costs aren’t really residing in G&A anyway.

Operator

And we’ll move to the line of Ki Bin Kim. Please go ahead.

Ki Bin Kim

Thanks. Could you comment on potential buyer mindsets on expectations for industrial real estate? Have they changed at all?

James Connor

Ki Bin, I think it depends on the buyer profile and whether we are selling Class A long-term well leased industrial buildings or some of our high quality office versus some of our probably lesser quality or one-off assets, I think the range is clearly across the board, but I don’t think we’re expecting any significant changes in buyers underwriting expectations since the things that we’ve since in the latter half of 2015.

Ki Bin Kim

Okay. And to follow-up on the previous question on G&A, I mean I am a little bit surprised that your G&A is kind of flat year-on-year after you've sold probably close to $2 billion this year and last year of assets. But I guess my question is, if you also include the service income or net service income, that's expected to come down a little bit.

I know in the past you said that's in a way your buffer that you can use that personnel to do more development or less. But given that your start guidance has come down a little bit, maybe you could comment on the longer-term trajectory of that part of the business, service income and people?

Mark Denien

Well, I think that will ebb and flow over time Ki Bin, but our start guidance is down, but I’d tell you that our volume of actual work that we are going to be performing will be even or up in 2016 over 2015. You got to keep in mind we had $238 million of the starts here right at the end of the fourth quarter, so all the work will be done on those starts during 2016. So that’s part of why our starts number is down in 2016 over 2015.

So if you think about overhead absorption, it’s more related to the volume of work being done, not the amount of projects that were started. So because of that I think it will ebb and flow, but we’ll still have service operating income come down because of all that volume that we are doing in 2016 for our own account rather than for third parties.

James Connor

Well, I think the other thing Ki Bin, I would add on just the G&A, particularly as it relates to your comment about the office sales. We have always tried to be out in front of that and not left to be holding the bag on overhead once the portfolio of sales have been completed. So we’ve typically been out in front of that with either outsourcing projects or rightsizing the staff and the teams as those projects have been market. So we’re carrying excess overhead for a period of time after the portfolios revolved.

Operator

And we will move on to the line of Eric Frankel. Please go ahead.

Eric Frankel

Thank you very much, a few questions. I can always jump back in the queue, but first, Mark, thanks for providing the leverage target for year end. Would there be any reason that would change over the year? And then maybe into next year depending on your cost of capital and how the public markets are shaping up?

Mark Denien

No, I don’t – I mean no reason they would change based on change in strategy or anything like that, if that’s what you mean, Eric. I mean obviously, they are going to be highly dependent on the timing and level of dispositions and things like that. So we try to provide a range and I think you could expect us to be at the more pessimistic into the range, dispositions coming at the pessimistic level. And the leverage levels will be at the more optimistic level if dispositions are closer to the high level.

So that’s really the only thing that I could see changing, but we’re very comfortable to ranges we put out there.

Eric Frankel

Would you be comfortable with exceeding your disposition target if you thought asset prices were being priced accordingly?

Mark Denien

Well, I don’t know that’s necessarily related to leverage, but I think that we would be very comfortable selling all the remaining office we have and then I think you will still see us take advantage like we did in the third and fourth quarter of 2015 buildings like the Amazon building in Delaware that we sold. I think we are going to sell some industrial in that number. So that’s how you get to the top end of that range is with a little bit more industrial sales.

James Connor

Yes, I think if you just do the math, the bottom end of the range is about equal to us exiting the office business. So if there was some move in cap rates, we would be at the lower end of that range as we held on to protect some of those industrial assets. But we are focused on selling those office assets.

Eric Frankel

Very helpful. Just moving to supply, I know you mentioned Dallas as being of some concern with overwhelming demand kind of placating that issue always this year. Can you talk about Eastern Pennsylvania and the prospects for your development there and developments going forward?

James Connor

Yes. You are talking about our 1.1 million square foot spec building. We have a great deal of activity. That building is just coming in service here in the first quarter. And I’m not worried all about that project. I think it’s a great project. As you can imagine, it's garnered a great deal of interest from a lot of e-commerce clients just given the nature of the development and the features that we put in there. So that one doesn't concern me at all.

Eric Frankel

Terrific. I will just jump back in the queue and let others comment. Thank you.

James Connor

Thanks, Eric.

Operator

We have a question in the queue from the line Dave Rodgers. Your line is open.

David Rodgers

Yes, good afternoon, guys. I wanted to ask maybe just about are you seeing any issues at all with tenant credit out there, or any additional look for sublease space out in the industrial market at all, I guess as you see some cracks in energy and other places? Anything to start worrying about on those fronts?

Mark Denien

No. Not really Dave, not at all. Obviously, our ears perk up when some of the data you've been reading lately come across the wire, but we had record-low basically non-existent defaults or credit issues in 2015 and we are constantly in touch with the folks in the field and we read the same as you do, but as of now we are not worried of any issues.

James Connor

No, if you go down to Texas, our oil exposure is so absolutely minimal. I think if you look at our portfolio Dallas and Houston combined is less than 3%. Well, you have 3% outside of the Dallas and Houston portfolios, only 3% of their attendance renewal and gas industry. So it’s incredibly small.

Mark Denien

Yes, so we don’t have a lot of concerns there Dave.

David Rodgers

Okay, great. Your 2016 development starts – I didn't hear if you said this earlier because I got on late today, but how does that breakout between MOB, industrial, and anything else you might be doing? And kind of where the yields on each of the categories that you might be starting?

Mark Denien

I think you’ll see the yields consistent with what we generated in 2015, the breakdown for us is typically somewhere between two-thirds and three-quarters industrial and quarter and a third on the MOB side. The advantage we have is again most of the MOB projects really look and function like build-to-suit are very substantially pre-leased like the two that we signed in the fourth quarter.

We still got a lot of good build-to-suit activity, so we evaluate spec as we bring projects and service and they get leased up. So that kind of the uncertain portion of the equation is how much spec we're going to take out, but we are still very active of the MOB in the build-to-suit side of the equation.

David Rodgers

And I guess just following up on the disposition questions, you had mentioned in your comments I think at some point, Jim, that you expected more volatility. So kind of same backdrop, but with more volatility. In everything that you are reading, does that make you want to hit that $900 million disposition target or what are the odds that you could push past that? And how are you feeling about that sitting here today?

James Connor

Well, I think I can’t address that, my first priority operationally is to exit the office business. So that what we are most focused on right now. Some of those projects are already actively being marketed as Mark said. We’ve actually already closed two early in the first quarter then we can start at last year. I think if these continue as we anticipate I think as we told all you guys we will be at the high end of that range.

If the market to change and there is an unexpected softening. I think you’ll see us continue to be very focused on the office and working diligently to get those projects sold and we will take the wait and see attitude on some of the other high value industrial once. Just like the Amazon building we sold, if we didn’t get our pricing and very consent to keep that building, it’s a great building.

David Rodgers

And I guess last question, Mark, in terms of the additional proceeds that you get from the asset sales, I heard your comment about potential smaller special dividend. But any other options that you could put that money into or are you happy sitting on it where it is?

Mark Denien

No, I think we’ll just payoff debt with that Dave, we’ve got $350 million of debt coming due and I think that all these - what I call excess disposition proceeds will go to pay that down. If we could do some 1031s that would be great, but we are not going to over pay for property just to do 1031. So that means there is a small special dividend so be it.

David Rodgers

Great, thanks.

Operator

We will next go to the line of John Guinee. Please go ahead.

John Guinee

Great, thank you. Jim, this is music to my ears and you know why. Looks like your land has gone down from $500 million a year ago to $382 million today. You're down to 4% of total enterprise value. What's the range that your Board expects you to be in when you look at undeveloped – when you look at both strategic and non-strategic land?

James Connor

Well, thanks John. We’re particularly proud of what our guys did last year and clearly, that helped the capital recycling. As we sit here today, all-in, if you count wholly-owned for development and everything else we are just over $400 million. We still have some non-strategic office land for sale that we’re going to try and move out. We do need to replenish some land in some of our markets where we’ve got good development activity.

Our goal is to get down is to get below $400 million. We would love to stay consistently in that $350 million range and we think as long as we could keep developing and monetizing land that way. We are buying it in much smaller pieces going forward, so we think we’ve made great strides and most of you can remember back at the start of the last recession when we had literally $970 million or $980 million of land. So we’ve worked diligently to change the company culture here and a run rate of $350 million to $400 million, it is a very comfortable run rate for us going forward.

John Guinee

Great. And then Mark, just to clarify a little bit, you had basically said you wanted your dividend to be 60% to 75% of AFFO. I think it was AFFO, so correct me if I got that wrong. But essentially at $1.05 midpoint for AFFO and a 65% to 75% ratio, that would imply $0.68 to $0.78 and your current dividend is $0.72. So it would imply that you are not expecting to raise your dividend in December of this year like you did last year. Is that accurate?

Mark Denien

Well, I guess John it is AFFO and I said - what I said is 65% to 75% of AFFO. So obviously we are not going to do anything with our dividend we just raised in the fourth quarter 2015 that’s at a level we want to run out right now. I am just doing the math because I’m not as quick at the numbers as you are, but at the $1.05 midpoint that’s $0.74, which is a little bit higher than we are running at now. If we hit those numbers and maybe even do a little bit better that would imply you could see a dividend increase later in this year, but we need a little bit more time under our belt to see what happens.

John Guinee

Okay. Does small special dividend or year-end 2016 imply along the same lines as 2015 or materially different?

Mark Denien

No, not materially different, John. In 2015 we paid out $0.20, which was essentially $70 million I think it could be anywhere from zero to around that number.

John Guinee

Great. All right, keep up the good work.

Mark Denien

Thanks.

James Connor

Thanks John.

Operator

We will go now to the line of Brendan Maiorana. Go ahead.

Brendan Maiorana

Thanks. Good afternoon. So, Jim, on the office side, you guys really did a great job monetizing your office over the past couple of years. But for the remainder that you have, are you seeing a price impact from what has happened in the financing markets and it's probably buyers' expectation that the macroeconomic conditions are a little less certain now than they were maybe, say, a year ago?

James Connor

I would tell you we are not. And you got to remember most of the buyers that we are dealing with are not doing kind of the traditional bank financing. We have seen a lot of private equity come into the office portfolio acquisition a la Starwood and Blackstone, even some of the smaller deals that we’ve done. So they are much less susceptible to interest fluctuations.

Most of them are looking to put capital to work. The office fundamentals have been good and improving in the last few years. So guys that want to invest in office, we’ve had good buyer pools for all of our products even some of the Class B stuff that we’ve sold in one-off smaller transactions. So I anticipate at least for the first half of the year being comparable to where we were in late 2015 in terms of our pricing expectations.

Brendan Maiorana

Okay, great. And then just last one for Mark. You guys have done again this year really nice job getting that spread between FFO and AFFO narrowed again. But you've got a pretty new portfolio; there's been a lot of development deliveries over the past several years so those assets don't require a lot of ongoing leasing. Is it – do you feel like the spread is sort of abnormally low now, abnormally narrow, and maybe it's going to widen out as we get a little bit more lease turnover in a few years time? Or do you think that kind of where you are you can sustain that level over the longer term?

Mark Denien

You know, Brendan, we really think we can sustain it. We think it’s I wouldn’t say abnormally low, but I think you got to keep in mind as long as we can do a good job of always pruning the bottom whatever, x percent of the portfolio out and keeping the youngest portfolio in the industry, that we think we can keep our CapEx down to a lower run rate than the next guy. So we’re really committed to having these bigger, nicer, newer boxes and that just translates into a lot less CapEx on a per square foot and per investor dollar basis. So we’re pretty confident, we can keep this pace going.

Brendan Maiorana

Okay, great. Glad to see it. Thanks, guys.

Operator

And we will now go to the line of Michael Carroll. Please go ahead.

Unidentified Analyst

Hey guys, this is actually George on for Mike. You mentioned the lease you signed with the large e-commerce company. Are there any markets in particular that will benefit from a pickup and leasing from e-commerce firms?

Mark Denien

George, that's an interesting question. And I think in general we’ve seen e-commerce touch virtually all of our markets and one of the phenomenon we’ve started to see in late 2014 and 2015 is while we’ve consistently seen these let’s call it 500 to a 1 million square foot. We are now starting to see in secondary and tertiary and infill markets some of the smaller e-commerce lease is for just in time delivery.

So I’d tell you we are seeing e-commerce all over the place. I think you’ll continue to see them grow in the major tier-1 markets, because e-commerce is – the delivery expectations are not going to get any slower and it’s about putting product in consumers hands as quickly as possible and that’s your tier-1 industrial markets and your major population centers.

Unidentified Analyst

All right. And then are there any other opportunities to prepaid debt in 2016 outside of the $250 million coming due?

Mark Denien

The only thing George would be the 2017 unsecured maturities we have are coming at us early in 2017. So there maybe a chance to take that out a little bit early, but other than that there's really not.

Unidentified Analyst

All right. Thanks guys.

Operator

We will go now to the line of Manny Korchman. Your line is open.

Michael Bilerman

Hey, it's Michael Bilerman. Jim, two questions. First just on supply. You talked about in your opening comments all, but four of your 22 industrial markets are north of 95% occupied. And I'm just kind of curious as you continue to develop – granted half of that is preleased. What are you seeing from a supply perspective given these record sort of occupancy levels and whether you see some of your peers or even a return of other merchant developers come into the marketplace, adding to supply?

James Connor

Well, I think our peers are just like us. I think they have been selectively developing spec, I think you’ve seen the merchant builders be fairly active across all of the markets. As we mentioned Dallas in particular has a very strong and deep profile of developers down there. I think the expectation is you will continue to see active development all through the year, most of the sources that we use, the brokerage or the consulting companies or the research companies, are expecting that we’ll hit some sort of the equilibrium late this year or early next year.

So that would anticipate we will have probably a couple 100 million square feet of absorption and approaching that in the supply side. I think we’ll be all right for this year, I think the question is as we finish this year and we start to go into next year. What do those numbers really look like? And will people have the self-control to pullback a little bit at the end of this year and next year when we get to that equilibrium.

Michael Bilerman

Do you have a sense at all, in terms of your preleased projects, how much of that is growth square footage for the tenant versus just musical chairs?

James Connor

Well, for us we would net that out, if we were taking somebody out of an existing lease and putting them in a new building. So for us it’s very little. I can’t speak to the overall, the effect of the overall input, but I think net-net when you look at 91 million square feet of net absorption across the country the net debt is very, very positive.

Michael Bilerman

Right. And then, secondarily, you talked about your first priority being to exit office I guess from a strategic standpoint of just fully cleansing yourself of that product, which has been going on for a number of years and you've executed extraordinarily well. Post doing that the MOB portfolio will be about just over 20% of the Company and it's been a great source for you from a reinvestment of all the sales proceeds into developing new MOBs.

I guess now once you reach the end of this year and sort of use it as I guess house to invest some of that excess capital in addition to deleveraging, does medical office become a strategic pivot point for you in terms of what to do with that portfolio? Or does it - or do you start thinking about that earlier as you think about how the medical office building, healthcare companies have traded, which has been extraordinarily well, being able to monetize that for shareholders?

James Connor

Well Mike, I can’t help but think about it everyday because I get asked about it everyday, so I’ll tell you there is always been a lot of interest in our medical portfolio, we believe the highest quality portfolio across the board, we’ve got a great team, even through the succession when Jim Bremner retired and our new team that is running the business, we’re creating a lot of value.

So we evaluate that strategically and as I’ve said before right now our focus is to exit the office building and we will always be thinking 12 to 18 months about the direction of the company and what we are going to do with all of our product both industrial and medical and all of the markets that we operate in. So today it’s full speed a head, we are cleaning up the office portfolio, simplifying the business and we’ll see what opportunities are created in the future.

Michael Bilerman

If you have a thought, do you think a spin-off of a $2 billion medical office company versus a sale of that portfolio, would you lean one way or the other?

James Connor

Well, at this point I wouldn’t lean one way or the other because I’m not really seriously looking at it. I think when we get to that point we will do what any prudent management team will and explore all of our options and what will create the greatest value for our shareholders.

Michael Bilerman

Great, thank you.

Operator

[Operator Instructions] We’ll go now to line of Eric Frankel. Go ahead please.

Eric Frankel

Thank you. I will try to make them two good ones. First, with your Chamber Street joint venture; obviously Chamber Street merged with Gramercy Property Trust and so they seem to be undergoing a new strategy. So I was wondering if there's any finality to that joint venture in the near future.

James Connor

Eric, that's a good question. We have been winding down that joint venture, and a lot of the activity in the Chamber Street joint venture was slowed by their acquisition by Gramercy. In terms of the overall number of assets I think we are down to under 10. I think probably eight if I am counting correctly. And I don’t think any of those for us are long term holds. So I think I thought has been to let our friends at Gramercy get their arms around the Chamber Street and then we will continue to look to exit most of those assets.

Eric Frankel

Okay, thank you. The final question, I found your phrase for how you think about the e-commerce business as an e-commerce real estate solution provider. Without giving away any trade secrets, I was hoping you could expand on that concept a little bit further and how you'd like to grow that segment of your development business.

Mark Denien

Well, I think, Eric, like any level of expertise in this industry or anything else, it's really based on people and for us it’s construction and development people who have a great deal of experience dealing with all of the e-commerce providers whether it’s the Amazons of the world or the Walmart.coms, all the way down to the third-party logistics providers who have been a growing source of e-commerce solutions.

Looking at and dealing with omnichannel distribution, we’ve just done a great deal of it across the country. We’ve built a lot of it. We understand what our e-commerce providers needs and where those differ from traditional industrial buildings and we are very comfortable with the direction and markets going and making investments in that product and that’s quite candidly what our clients want to hear.

40-foot buildings and heavy parking and losses truck parking. Those are the kind of assets that appeal to our e-commerce clients and we are very comfortable making those investment. So that’s we will continue to do.

Eric Frankel

That’s it for me. Thank you.

End of Q&A

James Connor

I would like to thank you everyone for joining the call today. And we look forward to seeing many of you during the year at industry conference as well as getting you out to see our regional markets. Thanks again.

Operator

And ladies and gentlemen, this conference will be available for replay beginning today January 28 at 5:30 PM Eastern Standard Time until February 11, 2016 at 11:59 PM. You access the AT&T executive playback service during that time by dialing area code 320-365-3844 and entering the access code of 383157. Those numbers again are 320-365-3844 with the access code 383157. And that will conclude your conference call for today. Thank you for your participation and for using AT&T’s executive teleconference service. You may now disconnect.

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