Duke Realty Corporation
Q4 2009 Earnings Call Transcript

Published: 29 Jan 2010

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to Duke Realty quarterly earnings conference call. At this time all participant lines are in a listen-only mode. Later there we will an opportunity for question instructions being given at that time. (Operator Instructions) I would now like to turn the conference over to Mr. Randy Henry; please go ahead, sir.

[Randy Henry:]

Thank you and good afternoon everyone and welcome to our quarterly conference call. Joining me today are Denny Oklak, Chairman and Chief Executive Officer; Christie Kelly; Executive Vice President and Chief Financial Officer; Mark Denine, Chief Accounting Officer. Before we make our prepared remarks, let me first remind you that the statements we make today are subject to certain risk and uncertainties that could cause actual results to differ materially from expectations. Some of those factors include our continued qualification as a re-general business and economic conditions, competition, increases in real estate construction costs and interest rates accessibility of the debt and equity capital markets, and also other risk inherent in the real estate business. For more information about the risk factors, we would refer you to our 10-K, that we have on file with the SEC dated February 25, 2009. Now for our prepared remarks, I will turn it over to Denny Oklak.

[Denny Oklak:]

Thank you, Randy. Good afternoon everyone and welcome to Duke Realty fourth quarter earnings call. On today’s I will update our view on key factors affecting our business as well as touch on portfolio performance for the quarter. Christie Kelly will provide an update on our 2009 financing activities and financial performance and finally I will discuss our 2010 FFO guidance. What a difference year makes as I think back to the call last year. A year ago we were facing a worsening US economy the worst we have experienced in our lifetime and no access to capital throughout the marketplace. Although the economy and business fundamentals deteriorate in further than expected in terms of unemployment consumer confidence non-residential fixed investment and GDP we were able to execute significant transactions throughout 2009 both in the capital markets and on the leasing front. 2009 was a year of significant challenges met by successes we raise over $1.6 billion of additional capital and renewed our line of credit in a difficult environment. We had clarity to our strategic plans and we completed over $22 million square feet of leases and closed the year with positive operating momentum. However, it is still one of the most difficult and challenging operating environments we have experienced. Although there has opinion some positive signs that the low point may have been reached in the cycle we are not optimistic that a rebound is around the coroner 2010. While unemployment figures continue to show a national average of around 10%, in December there are positive indicators that we maybe near the bottom of this cycle. Orders in shipments for capital goods rose in December pointing to pick up in business investment, current data suggest that as inventory levels have continued to be drawn down in the Q4 of 2009, inventory to sales ratios have come down to more normal levels. Freight and shipping volumes increased in the second half of 2009, with truck tonnage and container shipping data showing slower rates of decline with expectations that the trend will continue in to 2010. Consumer confidence is up modestly, this month again that still gloomy and far from indicating stability our growth in the economy. This data our points to an outlook that fist part of 2010 will continue to be slow but that the second half could start seeing pickup in activity which would benefit our industrial product initially with office recovery expected to lag in to 2011. Turning to operations we ended 2009 with continued success as we mentioned in the earnings release we executed over $22 million square feet of leases in 2009 including over $6.8 million in the Q4 which was our highest quarter since the Q4 of 2007. We also experienced overall positive net absorption of $2.6 million square feet in 2009. Occupancy in our stabilized bulk distribution portfolio was 88.9% at December 31, up about 75 basis points from the Q3. We had some significant deals during the quarter including the following. In Columbus signed a 10 year lease with Kraft Foods, after fully lease 936,000 square foot speculative of bulk industrial building. In Atlanta leased a previously vacant 550,000 square feet bulk building to two tenants both signed leases over ten years, safe light glass preparation took 65% of the space. In Chicago, we signed a 503,000 square foot lease to fully occupy speculative industrial building in the Dugan joint venture, placed in the service in the Q2 of 2009. The lease was with RTC Industries, which manufactures and distributes sales, displays internationally and the lease is for 12 years. On the renewal side, we executed a 437,000 square foot renewal with Philips Electronics North America at [Inaudible] industrial center in Columbus Ohio. This lease extends and currently expired in July of this year out to 2013, so very good activity on the bulk industrial side. On the office side, things continued to be slow, but we are holding our own there. The occupancy for our stabilized suburban office portfolio was 85.6% at year end down from 86.3% at September 30. A couple of key deals for the quarter included in St. Louis, we executed 11 year 77,000 square foot lease with Panera Bread for corporate headquarters. The key items that note about this deal as that it being moved into a building that was fully leased by another tenant who wished to vacate and we received a buyout from that tenant on that portion of the space that immediately backfilled with Panera. In Raleigh worked with our tenant with Lenovo to renew existing leases totaling nearly 400,000 square feet. If you recall, we built a three building campus for them in 2006 and 2007. The lease terms were extended by over three years moving expirations out until 2020 and early lease terminations rights that they had were removed in exchange for Lenovo giving back around 69,000 square feet of space and at this year received a buyout on the terminated space. This transaction really shows the flexibility that we offer the tenants to assist them in their needs and still protect our interest in the long term. Overall occupancy in our portfolio was 87.8% at year end, up from 87% at September 30. At the end of 2009, our wholly-owned development pipeline consisted of only four properties, comprising 660,000 square feet, which were 97% pre-leased with an anticipated yield of 8%. These projects required for approximately $30.4 million of additional capital to complete. Same property NOI for the year was a negative 2.7%. It was inline with our original expectations. Approximately 1.7% of this decline was driven by our blend and extends strategy transactions. Likewise of the negative 5.9% for the quarter, 2.4% was attributable to the blend and extend transactions. Just to note on the bulk industrial for the fourth quarter, 1.74% related to blend extend deals without those we would have been at a negative 6.99%. Our lease renewal percentage for 2009 was outstanding 79.6% with the small growth in that affective risk. We are very pleased with our operation teams ability to secure renewals on tenants, the 8% decline on the bulk industrial renewals on the net affective rents in the quarter is primarily attributable to renewals on short term leases we did on the quarter and we spent virtually no capital on those leases. Moving forward, we remain focused on deleveraging balance sheet, leasing our recently placed service and development projects, and executing on our operating asset, and capital strategies in order to drive a core operating income and continue offering our customers and investors quality service in returns. I will now turn the call over the Christy.

[Christie Kelly:]

Thanks Denny. Good afternoon everyone. As Denny mentioned, I would like to give an overview of our capital markets and financing activities and then provide an update on our financial performance. On the capital side of our business 2009 was a productive year. As Denny mentioned, we’ve raised over $1.6 billion in capital and improved liquidity position significantly. Proceeds were used to fully repay amounts outstanding on line of credit retire $850 million of unsecured debt that was scheduled to mature at various periods through 2011 and plans new development. We were successful in renewing our line of credit during November as planned. Under the terms of the renewal, the facility has a borrowing capacity of $850 million, with interest rate on borrowings of 275 basis points plus LIBOR and matures in February 2013. I’m also please to report, that there is currently no balance outstanding under the facility. We have over $1 billion of liquidity available from our line of credit, and cash on hand. For fourth quarter and year end 2009, recurring FFO was $0.31 and $1.45 respectively, excludes effects of certain non-recurring adjustments and in line with guidance. We are pleased with the results in light of the difficult operating the environment we faced in 2009. The decrease in recurring FFO from 2008 to 2009 is primarily the result of the common equity offering we did in April, the exit from the merchant building business in accordance with operating strategy and non-strategic disposition strategy. A few comments about fourth quarter and 2009 results, first we recognized $8 million of lease termination fees during the fourth quarter most of which were associated with the transactions in Raleigh and St. Louis that Denny mentioned earlier. The key message here is that we’ve been able to negotiate termination fees with some benefits to us in the longer term. Second, proceeds from the fourth quarter non-strategic building dispositions were $144.4 million. At a stabilized capitalization rate of 8.3%, and primarily comprised of mid-west office properties as communicated in the strategic plan. For the year ended 2009, company received gross proceeds of nearly $300 million from the sale of non-strategic properties and land parcels. We also had a strong pipeline of disposition that we’re working ongoing into this year. G&A expenses for the quarter and year included $2.9 million and $9.6 million respectively at severance costs. These costs were included in the recurring FFO results. The completion of all of our capital raising transactions has allowed us to improve on our key leverage metrics from 2008 and delever our balance sheet. Effective leverage was 56.5%, at year end compared to 59.8% at the end of 2008. We made great progress on this ratio with a success of common equity offering in early 2009, and the debt buybacks executed throughout the year. I want to point out that we include those debt and preferred stock in the calculations. Our fixed charge coverage ratio at year end was 1.8 compared to 1.9 for 2008. We anticipated this ratio to trend down slightly in 2009 as a result of asset dispositions and decision to hold cash on our balance sheet towards the latter part of 2009. Net debt

[Denny Oklak:]

Thanks, Christie. We’ve announced a range for 2010 recurring FFO, of $0.95 to $1.15 per share. I’d like to provide a little color in and background to your 2010 outlook. Before I talk through some of the details, I want to make a few overall comments on our guidance. Our belief is that, fundamentals in 2010 will be challenging in both industrial and office as a result of weaker occupancy and pressure on rental rates. I’ll now talk through some of the key performance metrics outlined on the 2010 range and estimates page we provided on our website. Our portfolio occupancy range for 2010 is 84%, to 87.5%. Our portfolio occupancy year end 2009 was at 87.8%. We anticipate in our guidance to lose about 100 basis points of occupancy in the Q1 of 2010, for normal expirations we do not expect to renew. This would put occupancy around 86.5%, at the end of the Q1. From then through the rest of the year we are assuming occupancy holds fairly steady the bottom end of the range would result from unanticipated terminations or bankruptcies like we experienced early in 2009. Same property NOI growth is projected at a range of negative 1%, to negative 5%. In the last two quarters of 2009 our same property declined by over 5%. This trend will begin to reverse itself and we will see some improvement in the later part of 2010. However on average for the year we will still be in the negative 1% to negative 5% range. On the capital recycling front, we project proceeds from building dispositions in the range of $150 million to $350 million, and proceeds from land dispositions of $20 million to 50 million. As Christie mentioned earlier we have a good backlog non-strategic assets that poised to sell in 2010, this is consistent with our strategy to reposition our portfolio over the next few years. Developments starts are projected in the range of $100 million to $200 million. We expect medical office starts of between $100, 150 million. As this project type continues to experience growth opportunities as hospital and construction projects including medical office are expected to increase in 2010 and 11. This results from a number of delayed projects because of the economic environment and debate over healthcare reform. The rest of the development starts will come from build receive projects. Construction volume in the range of $600 million to $750 million, if you look at the components of the projected volume third party construction is a significant piece this year due primarily to the Brac project in Washington D.C. and the Baylor Cancer project down in Dallas, both of which are 2011 deliveries. We have assumed no gain on the sales development properties or land in the guidance. Also that there were no such gains in our 2009 reported recurring FFO either. We look at the disposition of any non-strategic as a capital recycling function and believe that gains restore recurring operational FFO. We have assume no income tax benefits or expense in 2010 compared to $13.3 million of tax benefits included in 2009 recurring FFO. This is result of our decision to exit the merchant building business. G&A expenses in the range of $389 million to $45 million, is our projection for this year. I would like to mention that the 2009 G&A of $47.9 million that we reported includes approximately $9.6 million of severance costs. We reduced total overhead expenses by over 10% in 2009. We are pleased with all we accomplished in 2009. We are especially please we end of the year with solid leasing momentum. We know that 2010 will be another challenging year, but we are well positioned to meet those challenges and look for opportunities. I thank you and just before I open it up for questions. I would like to say Go Colts. Thank you.

[Operator:]

(Operator Instructions) Your first question comes from Ki Bin Kim - Macquarie.

[Ki Bin Kim:]

So, if you could breakout your same store NOI and occupancy guidance between industrial and office for us?

[Denny Oklak:]

Ki Bin we don’t have that information available here today. We’ll look at that and Randy and Mark will see if we have that data and then we will try to give you ranges on the website.

[Ki Bin Kim:]

Second part, if I look at the low end of your guidance especially occupancy number of 84%, seems like you only have 8% of our leases expiring in 2010, in order to hit the Mark it seems like you have to retain 50% of the leases and do zero new leasing, seems like a unlikely scenario and I know you made some comments about your first quarter tenant losses but other big leases coming up that you are not certain of or what am I missing here?

[Mark Denien:]

Well, I think you really have to look compare that with our guidance range. Obviously if we were to get down to the 84% it would be on just normal lease expiration keep in it would be as I mentioned in the remarks through bankruptcies or other tenant terminations. So we experienced a lot of those in 2009 so we are being cautious going in to 2010. So in the case that those happen, I think we will be we could end up closer to the bottom end of that range. As I mentioned we do know of about 100 basis points of worth is going expire in the first quarter, sort of the midpoint of our guidance assumes we say sort of flat for the rest of the year and then the top end of our guidance would say that we start making some leasing improvements because things improved during the year. We are sitting here today not in a position to really know for sure what the leasing environment is going to be like this year, as we said we’re pleased with the nice deals we did in the fourth quarter, but we are still very, very cautious.

[Ki Bin Kim:]

Occupants 100 basis points coming from industrial or office?

[Mark Denien:]

It would be coming from industrial, the pick upside for two reasons the bigger spaces so when you do lease those it has a bigger affect on occupancy and quite honestly, I think we do feel moderately optimistic I would say we will see some kind of industrial activity that year based on what we saw in the fourth quarter, but we are not very optimistic on the office side. I think this office recovery because of the unemployment and where we are in the cycle is just going to be a little bit longer and we just can’t really see that turning around for much anytime in 2010 we certainly feel pretty good about being able to reasonably hole our own on the office side this year but don’t see a lot oaf pick up.

[Ki Bin Kim:]

One very quick question, does your guidance include you guys buying back debt in 2010?

[Christie Kelly:]

Hi, Ki Bin, no it does not.

[Operator:]

Your next question comes from Sloan Bohlen - Goldman Sachs

[Sloan Bohlen:]

Denny, maybe we could start a little bit with your comments on office and your sort of outlook for that and then maybe reconcile with what you expect for potentially selling assets as you guys reposition the portfolio little bit. I know in the release you commented a little bit about potential dilution from sales. I wonder if you can offer detail there.

[Denny Oklak:]

Sure. I just think that the office business is going to be tough this year. We are now down in about the 85% range on office. If you look back to the last cycle we ended up the bottom end and occupancy on the office side around 84%, when we finally hit bottom and my guess is it could get close to that again on the office side here and so we are just watching that very closely. There are a few deals out there, but there is not a big backlog of deals on the office side. I think a lot of our customers are just being very caution right now.

[Sloan Bohlen:]

I think my question very little bit more towards potentially selling assets and what the buyers would be looking for right?

[Denny Oklak:]

On the sales side then a lot of what we have teed up is still from the build to suit portfolio for projects that we started in 2008, that are being completed for example, the GE aviation buildings and down in Cincinnati are build to suit portfolio we do anticipate being able to close on those when I they’re completed this year, that was always our intention with those buildings. We’ve got a few other projects that we’re looking at that we’ve got some contracts on. We got a VA medical office building that we’re planning on completing and selling this year. So those are more of the type of projects we’re talking about selling, again that those type of projects made up a lot of what we sold in 2009 also. So there’s not at lot of multi-tenant type of office properties that we’re anticipating selling. There are still just the build in suit and lot of single tenant product.

[Sloan Bohlen:]

A question for Christie just given what spreads have done and how much they’ve tightened, it seems like you guys are primarily sticking with that sales as the source of delevering, but is there thought about potentially going into the market for additional mortgage debt, or potentially even unsecured?

[Christie Kelly:]

We looked at that a lit built and we’re really paying a lot of attention and monitoring on a daily basis as you can image, both spreads as well as perspective on treasury rate and we got a view towards, what our breakeven rate is to the extent that we were to takedown some debt and then go back out into the market and issue unsecured. Again it would all be in alignment with our capital strategy. The fact of the matter is, right now NMPV, such a trade would be so negative that it’s really not worth going into the market at this point in time, but we’re paying close attention to it.

[Sloan Bohlen:]

One last question if I could, Denny just on couple of the projects in the pipeline, if you could get an update, one on the Buckhead asset or development. Secondly, it looks like in the unstabilized portion at least on 18, just the medical office buildings, it seems like about half leased. Just wonder, what the lease up progress is there?

[Denny Oklak:]

First of all on the Buckhead project, we now have executed our first lease down there. Basically, that the shell is complete on the project we’re now really very focused on the leasing activity as we have been for a while. There are a number of lease opportunities in the market today; also there are a lot of things that we’re working on. Obviously, what I would say is there are two things the concessions are obviously a little bit higher than we pro forma and tenant improvements that we’re seeing in the market are higher that we originally performed on that building. We’re working with our construction lender to just make sure that we can execute on the leases that make sense long term for that building. So we’re just moving ahead and working on now filling the space.

[Sloan Bohlen:]

Then on the medical office buildings?

[Denny Oklak:]

On medical office buildings, we’ve got basically four buildings are that unstabilized in that portfolio. We’re working our way through those. There’s a good leasing activity. A lot of the lease up, most of the buildings start out somewhat pre-leased, the specs space then can take a little bit longer to fill up because, it’s smaller tenants with doctors offices, the hospitals are the larger tenants of the doctors offices many times are smaller tenants. So it just takes a little longer, but we’ve seen reasonably good activity. I will tell you that I think now it’s starting to pick up because, I just think in the whole healthcare industry, this healthcare reform that was going on in DC was just kind of hanging over the industry like a little bit of a cloud. Now I think people are starting to loosening up, because it certainly, no do not believe that major healthcare build was getting close to passing is going to pass now.

[Operator:]

Your next question comes from Josh Adi - Citi.

[Josh Adi:]

Could you tell us what’s the size of the asset sale pipeline, how close are you to closing some of those deals?

[Denny Oklak:]

Again our estimates for this year are $150 million to $350 million. I would tell you that in our pipeline today, we’re towards the upper end of that range right now and there’s probably again in today’s world you never know until the moneys wired and you got the fed reference number, when its closed. I would say that there’s a reason we give a chance with the projects we got teed up today that we could get close to the higher end in the first six months of the year.

[Josh Adi:]

Can you talk a little bit about your thoughts on using the revolver, if the pace of asset sales were closer than you expect, would you be inclined to use the revolver to temporarily fund your longer term commitment until the sale came through?

[Denny Oklak:]

We really don’t have any longer term commitments.

[Josh Adi:]

A debt maturity is on the development pipeline funding?

[Christie Kelly:]

Actually, we’ve got cash on hand today and as it relates to the debt maturities, we paid all remaining unsecured debt maturities through 2010 and working on providing for 2011.

[Denny Oklak:]

So the cash that we have on hand will cover all of our development expenditures. So at this point in time, when we look at the plan as we presented to you all, we don’t really show tapping into that line at all this year.

[Josh Adi:]

Then I had a question on Michael Bilerman’s question. As you think about the occupancy for a second. At the high end of the range at the optimistic case you’re affectively just assuming that you’re doing about 11 million square feet of leasing during the year, affectively, I guess this is average occupancy for the year not ending occupancy is that right?

[Denny Oklak:]

Yes, I think that’s about right, Michael.

[Josh Adi:]

I guess in the ranges, what would be the ending occupancies for the year that would go around these ranges?

[Denny Oklak:]

Again, as we said it would probably be in 86% to 87% range.

[Josh Adi:]

By the end of the year?

[Denny Oklak:]

Yes. What we said, Michael, we think we’re going to lose 100 basis points in the first quarter then our assumptions really kind of the flat for the rest of the year.

[Josh Adi:]

So that occupancy has been lost late in the first quarter then if you’re starting the year at 87.8%?

[Denny Oklak:]

Yes, it’s throughout the first quarter.

[Josh Adi:]

To get an average of 87.5% for the year, you got to be going up above 86.5% for the back, right?

[Denny Oklak:]

Yes, I just don’t have those numbers exactly in front of me, Michael. I know that we did drop down and then come back up a little towards the end of the year, and what our folks are looking at on the leasing side.

[Josh Adi:]

If we put 11 million square feet, if that’s the high end of guidance right, putting 11 square feet of leasing in affectively? You did 15 million in ‘09. You did 13 million in ‘08, two extraordinarily different years. So I guess what sort of elements would actually take you down to the low end, assuming you’re able to do that sort of leasing volume, even if rent spreads are getting hit. I got to imagine even if you lose to bankruptcy or buyouts, which I know was 1.8 million in ‘09 and under 1 million in ‘08, but we should not be even seeing close to 84% occupancy and if things actually don’t come i.e., if you don’t have much default and you’re able to get your leasing up to 13 million to 15 million square feet in optimistic scenario could be a lot higher than what you are putting?

[Denny Oklak:]

I think it could be a little higher, yes. I would tell you that again, let me try to just explain how we’re looking at that. Obviously we say pessimistic, we mean that isn’t very likely. I mean there’s not a high probability of getting all the way down there, but you’re exactly right as I said that would be because we have some unexpected terminations defaults bankruptcies and then...

[Josh Adi:]

On top of your leasing volumes being much, much lower than they historically have been?

[Denny Oklak:]

Yes, I think we are anticipating leasing volume maybe down a little bit this years that hold relatively consistently with those last couple of years and maybe down a little bit. The real key is the unanticipated termination. So you’re right, Michael that if we hold steady we will probably be right around that and look back and don’t have unanticipated terminations do that same type of leasing volume we will probably come out right around or close to the top ends of that guidance.

[Josh Adi:]

I would say your pessimistic scenario is very pessimistic and your optimistic is probably more of a realist?

[Denny Oklak:]

Well, I’m not going to let you put words in Michael because I just don’t know what to expect. We saw a lot of surprising things in 2009 and what I’m trying to layout for you all is sort of the range of things that could happen. If the economy holds kind of steady here, it looks like we saw some pretty good GT growth in the fourth quarter. If that occurs in the first and second quarters, then I think we will have the opportunity to do some leases. We will probably lose less tenants and I think we will get there, but again we just don’t really know what’s going to happen and in this environment on the bottom end, I want to provide you guys with the bottom end that even if things turn fairly bad, again, we think we will be able to make it.

[Josh Adi:]

I just want to clarify, even if you don’t do the sales, $150 to $300 million of asset sales you feel comfortable you will leverage your line use resting cash rather than come to the market with common equity?

[Denny Oklak:]

Let me put it this way we wouldn’t need to come to the market for anything really. Because we got plenty of capacity again we believe with cash and through the dispositions as Christie said all of our 2010 maturities are basically paid. So we don’t have any real maturities until May of 2011. There is no reason for us to go to the market unless for any kind of capital unless there is some kind of transaction we want to do or some tender offer for our debt if it ever made sense there is no reason for us to come to the market.

[Josh Adi:]

Denny, when you look at the 2010 sources of funds you including your share of the JV maturities?

[Denny Oklak:]

Yes.

[Christie Kelly:]

Yes, we are.

[Josh Adi:]

Even including that you feel like you have enough cash if you didn’t sell any assets you have enough cash in revolver capacity to get through it.

[Denny Oklak:]

Yes.

[Christie Kelly:]

Yes.

[Denny Oklak:]

We didn’t sell assets we might have to draw on the line just a little bit but probably not much there.

[Josh Adi:]

So most of the joint venture debt can be 100% rolled over?

[Denny Oklak:]

Yes, there is really only one joint venture piece of any significant this year. That’s our joint venture with JP Morgan. We have we are 50% partner in that. We have a $200 million CMBS loan coming due in October and we haven’t concluded, we could easily refinance that, that loan was done back in 2000 that about 50% loan to value that’s an industrial property joint venture. So we could easily refinance that. Our partner hasn’t communicated to us yet exactly what they want to do with that, but even if we do need to repay our 50% of that loan, this year and we still have cash to do it without even drawing on the line and that’s it there is no other maturities this year.

[Operator:]

Your next question comes from Jamie Feldman - Bank of America.

[Jamie Feldman:]

So, when you look at your guidance and you have this 90%-105% AFFO payout ratio can you talk a little bit about but the safety of the dividend even if you end up with the 90% range and I don’t know if you’ve been able to model out taxable net income, could you cut the dividend and how should we think about that?

[Denny Oklak:]

Let me start and Christie can jump, but we took hard look at this and we really feel that that dividends very safe. We are looking, they really additional NOI as we do lease up that portfolio going out in to 2011 and 2012, which are going to easily cover that dividend. So we just felt very comfortable leaving it at the level that it’s at today and while it could be tight this year going forward as the economy eventually does improve, which it will, will easily cover it.

[Jamie Feldman:]

What level makes you comfortable in terms of a FFO payout?

[Denny Oklak:]

I’d rather be down somewhere in the 80% to 90% level. Again, we cut the dividend a year ago and then adjusted it when we did the offering in April for the affect of the offering and our intent when we did the cut last year was to take it as far as we ever thought we would need to take it. So when we’re looking at this year again we feel like we’re in not exactly where we want to be, but we’re pretty close and going forward, we don’t think it’s an issue.

[Christie Kelly:]

Jamie, that covers it really as Denny said, we’ve taken a very hard look at this for this year as well as projected ‘11 and ‘12 and feel comfortable with supporting the current dividend level.

[Jamie Feldman:]

Then can you talk about the watch list, you said the down side risk is additional bankruptcies or tenant move outs, how are things in the portfolio today in both office and warehouse?

[Denny Oklak:]

They did pickup the first quarter of last year. We saw a lot of issues the second and third quarter were a little better, a few more issues in the fourth quarter this year. All of our folks out in the field really know and we do have a list of tenants that are on the watch list. I’m relatively certain we’re going to get hit by one or two folks that just drop out this year because we know that there are two or three larger tenants on the industrial side mainly that we don’t think are going to make it through. So we could see more industrial vacancy from those tenants and again probably in the first three months of this year.

[Jamie Feldman:]

I assume that 100 basis points you’re talking about, but beyond those, can you say kind of comfortably that the worst, I know the worst is over, but you really don’t think unknown bankruptcies will be an issue in 2010?

[Denny Oklak:]

I can’t really say that Jamie, because we just experienced so many in 2009 that we’re coming at us from different places that I wouldn’t feel comfortable today saying, that we won’t have anymore unknown bankruptcies. Maybe by the middle of the year as we see things, I will be comfortable saying that, but I can’t say I’m sitting here today saying that.

[Jamie Feldman:]

Then in terms of the strategic plan you announced last quarter, can you give us update in terms of I mean there’s been any changes to it operationally, it seemed like you were moving a lot of the market operations to the local markets like is everything going as planned or have you had to tweak it at all?

[Denny Oklak:]

No everything is going just as planned. The key pieces are, we completed our internal personnel restructuring and that’s going as anticipated. We are moving forward on the disposition strategy that we laid out to change the mixture of our assets and again as we pointed out last quarter and at the meetings we had, a lot of that those dispositions are still coming from what was our held for sale portfolio, so those are moving. Then when you look at the focus of our development this year as I mentioned, we think primarily that will consist of the medical office development this year, which as you know the plan that we laid out is our goal to increase our investment in the medical office piece of the business and we’re moving ahead. So everything is really right on track.

[Jamie Feldman:]

Then finally, can you just reminds us what your fee stream is for the Brac project and Baylor project and then also what your yields are in the medical office projects you plan to start?

[Denny Oklak:]

Let me start with the latter. The medical office projects, we’re looking at sort of in the stabilized yield of in the 9.5 range, something like that we think is achievable in today’s market. On the Brac and Baylor Cancer Center project, we’ve got let’s see, about $400 million of fees from those two or excuse me of construction volume of those two and 2010, and our average fee rate on them is probably right around 5%. Something like that we were right around 5% on the Brac project, that’s the bulk of that development of the construction volume.

[Jamie Feldman:]

Is that fall-off in 2011?

[Denny Oklak:]

It will fall off, but it will be pretty consistent all the way through September of 2011 at least. That’s when the Brac project finishes and it’s going to be right up to the end.

[Operator:]

Your next question comes from Brendan Maiorana - Wells Fargo.

[Brendan Maiorana:]

Denny as I look at your guidance for the year, there is obviously a decline in FFO from the same store pool, which we hope will reverse in 2011, but there’s also a significant drag on earnings from net disposition. If I think about your deleveraging goal and getting to 45% leverage from 56% today, it would seem that you’ve got a billion or more of kind of net dispositions that would have to occur over several year timeframe. I know a portion of that is land, which I think we talked about was around $250 million, and a portion of that will be development projects, which are contributing to earnings today. It seems like there’s going to be a significant proportion of the net position that would be income producing properties. Are you worried that you’re going to have this kind of continued pressure on earnings for a few years from net disposition?

[Denny Oklak:]

Well, I’m not overly concerned about that Brendan, because we’ve got a plan here to really reposition the portfolio, and it is going take sometime on the dispositions, but I think, during that time period when we’re doing the dispositions, eventually we’ll have some opportunities to get back and invest more of that capital in development. We haven’t really talked about acquisitions, but we certainly aren’t ruling out acquisitions to advance our strategic goals and get the right assets in the right geographic locations for a long term plan. So I think we’ll be able to time the dispositions and then redeployment of the capital to minimize the dilution.

[Brendan Maiorana:]

It would seem that if you’re not retaining any capital or not much because your at least for this year you’re paying out roughly your FFO is roughly equivalent e to your dividend you’ve still got a lot of net disposition activity that has to occur net of whatever acquisitions or development that may occur, if you want to reach your leverage goal?

[Denny Oklak:]

Yes, true. I think it’s pretty easy to do the math and eventually there maybe sometime where we need equity or have we do acquisitions with equity or something like that, but it’s a long term thing now, because we don’t need it today. So it’s a long term goal. We’ve said that this is going to take sometime for us to get there. Our goal is really out in 2013 to have this there. Certainly, we love to get there more quickly and if things go well, we will get there more quickly, but I think it’s a long term thing, but yes, if you look at the numbers eventually we’re going want to have more equity in the business.

[Christie Kelly:]

Brendan, the only other thing I’d like to add is that, we can’t lose sight of the embedded NOI that’s retained in our portfolio, which offers significant upside that has not been factored into necessarily the guidance for 2010. As we look forward to 2011 and beyond, we view that as the economy turns around, we’ll unleash that embedded NOI as we’ve been able to prove time and time again from operating perspective, which will balance out that dilutive affect, so don’t forget about that.

[Brendan Maiorana:]

Christy, maybe if I could follow-up on that point, if u look at your supplemental on page 19 and the projects, this is just the wholly owned stuff, but the projects if I look at the NOI rate that you are getting on project for the service greater than a year, less than 90% leased, you got about 54% leased, the rate of NOI that you are getting on those projects today comparable to the expected return that you would get if they were 90% or 95%, at least meaning or expecting increased growth in terms of rent. If I look at your kind of schedule on page 34, those target returns?

[Christie Kelly:]

We do not expect and or in the embedded NOI that in the numbers we quoted Brendan do not expect any growth in those numbers specifically it’s at the current rental rates that we are experiencing in the portfolio, so we haven’t been aggressive in that regard.

[Brendan Maiorana:]

Lastly, your capitalized interest for the quarter was about $5.8 million that seems high to me relative to the amount of IP that you have is there anything else that you’re capitalizing interest on.

[Christie Kelly:]

No, there isn’t Brendan.

[Brendan Maiorana:]

If all those projects lease up and come on line, plus the projects that have been on line for less than a year, the portion that’s not leased thane we would expect to see that whole 5.8 million quarterly interest be expenses for the income statement.

[Operator:]

Your next question comes from Michael Knott – Greenstreet Advisors.

[Michael Knott:]

Denny I was curious if you could mind set of our office tenant versus industrial tenants.

[Denny Oklak:]

I think that’s an interesting question and trying to figure out how to answer that, but I think I can give you insight. Let me start with industrial, I think what we are seeing right now is some of the larger companies that need distribution space are getting out there being pretty aggressive at taking space today I think we experienced some of that in the Q4 because they are beginning to think I we are at the bottom on what rates are going to go and what space is going to be. So I think some of the folks are out there will trying to get their space needs taking care of locking in to long term leases right now on the industrial side, which I think is very goods idea on their part, I think it’s ultimately good for us because we are leasing up some of the space, what we found as we mentioned in the repaired remarks a lot of the space occupancy pick up was in the new buildings. So we are seeing folks consolidate and do some things and want to take space in the new buildings at what they feel are very favorable rental rates and terms to date. So that is what we are seeing on the industrial side. On the office side, what we are seeing is a little bit of the same, folks are relocating from BMC space to H space and getting the same kind of rents, what we are also seeing on office side though is looking for quality landlords. Tenants are finding now that they are in the middle of the downturn and want to renew the lease or they want do something to their space they got landlords out there that don’t have the money to do it and can’t really do the things they want to do. So the offices tenants are taking are really taking this opportunity to improve not only the quality of their buildings but the quality of their landlords. Long term because they realize there has been a number of issues out there on the landlord side during this downturn. So those hopefully that’s a little bit of what you are referring to, those are probably the two highlights I would say on the product types of what we are seeing right now.

[Michael Knott:]

Christie I know you commented that Duke is snot looking to raise unsecured debt right now, but I was curious if Duke were to go out and raise some unsecured bonds what kinds of terms do you think it would get?

[Christie Kelly:]

Well we got some very attract terms that we’ve been looking at to the point, where to go out to issue today it would be trading through our secondary. So we think that versus historical averages close to where we executed historically, but again it's not attractive overall given where we are with our capital strategy and also looking at the breakeven MPV going forward it's a matter of where rates go.

[Operator:]

Your final question comes from [Shane Buckner] - Wells Capital Management.

[Shane Buckner:]

You mentioned earlier, looking at acquisitions, I’m just curious are you seeing anything in the market now that is tempting at all?

[Denny Oklak:]

We haven't seen a lot, I would say, there’s a few one off buildings that we’re look at that we think we can get for some reasonable pricing, mostly from private developers or private owners that might have some issues. Haven't seen a lot of the big portfolios breakout yet. So we’re monitoring it and looking, but we just haven't seen a lot yet.

[Shane Buckner:]

Would you primarily be looking in the industrial and health care areas?

[Denny Oklak:]

That's correct. That's inline with really our asset strategy.

[Operator:]

At this time, I’d like to turn call back to you for any further closing comments, sir.

[Denny Oklak:]

Thanks everyone for participating. Our next call will be our first quarter 2010 quarterly call, scheduled for sometime in April. That's it. Thank you.

[Operator:]

Ladies and gentlemen, this conference is available for digitized replay after 5