Duke Realty Corporation
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Ladies and gentlemen thank you for standing by. Welcome to the Duke Realty Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a questions-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to host Mr. Ron Hubbard. Please go ahead.

[Ron Hubbard:]

Thank you. Good afternoon, everyone, and welcome to our third quarter earnings call. Joining me today are Denny Oklak, Chairman and CEO; Jim Connor, Chief Operating Officer; and Mark Denien, Chief Financial Officer. Before we make our prepared remarks, let me remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you to our December 31, 2012 10-K that we have on file with the SEC. Now for our prepared statement, I’ll turn it over to Denny Oklak.

[Denny Oklak:]

Thank you, Ron. Good afternoon, everyone. Today I will highlight some of our thoughts on the overall real estate operating environment and how it is affecting us, Jim Connor will give you an update on our leasing activity and development status, I will review our recycling activity and Mark will then address our third quarter financial performance and progress on our capital strategy. We followed up with the positive momentum in the first two quarters with continued strength across all areas of our business. We signed over 6.2 million square feet of leases in the third quarter and we achieved a 54% tenant retention rate with more of the square footage expiring already back filled as we indicated by our overall increase in occupancy. We started $76 million of development projects across industrial, medical office and suburban office projects with a weighted average stabilized yield of 8.3%. Three of our four new development starts are 100% pre-leased build-to-suites with the four a multi tenant project that is already 64% pre-leased. I will touch on the development in a little more detail shortly. Our in-service increased 35 basis points from last quarter to 93.5% while our overall portfolio occupancy increased 30 basis points at quarter end to 93.4%. I am happy to report that all product types contributed to this overall increase in occupancy. We made continued progress on our asset repositioning strategy during the quarter, generating $73 million of proceeds from non-strategic property and land dispositions with the portion of proceeds being recycled into two high quality industrial facilities, we acquired for $39 million. Mark will speak more in depth on our capital activities in a moment. I’ll now touch a little bit on the overall market conditions we’re experiencing and how this is affecting our business. In spite of GDP mumbling along between 1.5% to 2% in continued uncertainty coming from Washington DC, we saw improved fundamentals across all of our product types and in most markets during the quarter. Starting on the industrial side, leasing has remain strong as reflected by another 10 to 20 basis point drop in national vacancy rates during the third quarter to the 8% range, with improving rent growth prospects. This decrease in overall vacancy has certainly been aided by the still relatively low level of new supply. But nonetheless leading indicators such as trucking rail and the ISM have shown increasing strength which bodes well for a continuation of solid industrial demand. We also continue to see more relative strength in the big box industrial product. In particular, the trends in e-commerce are firmly intact with direct business to consumer retail sales expected to grow 20% per year, which is driving steady incremental demand for larger, modern fulfilment distribution centers primarily between about 300,000 and 1 million square feet. And obviously Duke Realty is clearly a national leader in the ability to facilitate tenant expansion and the ongoing ability to efficiently operate modern bulk industrial facilities. 40% of our existing portfolio, our buildings over 500,000 square feet which has a current occupancy level of about 97%. The remaining 60% of our industrial portfolio represents buildings less than 500,000 square feet and are just under 93%. So, obviously we have some additional upside in our overall industrial occupancy of about another 100 basis points or so. In addition, we have entitled land positions in major distribution markets on which we can develop another 50 million square feet of bulk industrial product. With respect to leasing in our in-service portfolio, we continue to see fundamentals improve that the completion of nearly 4.1 million square feet of leases for the quarter. Bulk industrial in-service occupancy rose to 94.6%, 23 basis points above the previous quarter and nearly 70 basis points above a year ago. 13 of our 22 book markets are now over 95% leased with 5 under 90%. As we stated last year, the lack of available large block space in key distribution markets is generating growth opportunities in our development business and improves our position to push rents. Moving to medical office and starting from a macro level, we consistently stated that the commencement of The Affordable Care Act will only help the demand for new outpatient facilities as these types of facilities will help health systems lower cost of care and handle the increase and short individuals coming into the system. This is proving to be true as we see high demand from major customers, through our facilities to handle these new patients. Finally, the suburban office sector has continue to show more positive trends, although national vacancies are in the mid to high teens, net absorption stayed positive for the 14th consecutive quarter and rental rates per square foot are up a few percentage points since the end of last year after nearly five years of stagnant rent. Similar to last quarter we've had increasing momentum in suburban office leasing and place in the context of our active disposition program. Our quarterly average same property occupancy is up 150 basis points over the prior year. Overall in-service portfolio occupancy at quarter end now stands at 87.2 which is up 72 basis points from the prior quarter. Now I'll turn it over to Jim Connor to give a little more color on our leasing activity and development pipeline.

[Jim Connor:]

Well thank you. Good afternoon everybody. We’ll start off on the industrial side, several notable deals that we executed this quarter include two new leases in our distribution parks down in Dallas. The first one was a 378,000 square foot new lease with Continental Tire that backfilled the space where we had a prior tenant bankruptcy. Then in the second space was a 263,000 square foot new lease with Anna’s Linens that brings our Dallas industrial portfolio to over 98% leased. We also had a lot of strong activity in the Indianapolis market. We signed a new lease with Genco for 309,000 square feet in airport submarket. We also executed two large renewal leases in Indianapolis one was an auto supplier for 520,000 square feet and the other was a third part of logistics company for 383,000 feet. Across our entire portfolio we signed 70 industrial leases this quarter, a level that exceeds even our expectations to lead in the second half of the year. And I would tell you that the industrial leasing prospects look bright for the remainder of the year. With improved lease fundamentals we've signed nearly 1.4 million square foot of leases in our suburban office portfolio. Some of the most notable deals include 58,000 square foot lease with Farmers Insurance in our South Florida market. Similar to last quarter, we had strong leasing activity in the Midwest suburban office portfolios. Most notably in St. Louis, we signed an 87,000 square foot lease renewal with [Etna]. In Indianapolis, we signed a 75,000 square foot lease renewal with the major accounting firm. And in Cincinnati we signed a 64,000 square foot lease renewal with UBS Financial. On the medical office side, our in-service portfolio was up 85 basis points reflected by strong leasing activity across the quarter, portfolio. I’m pleased to report that our development starts are continuing at a steady pace after $222 million of starts in the first two quarters. We started over $76 million in developments across four projects during the third quarter. The starts are diversified mix of industrial, medical office and suburban office and both ground up development and expansion projects. On the industrial side, we started a 534,000 square foot build-to-suit in our West Jefferson Park in Columbus, Ohio. That facility is leased to 10 years to Ace Hardware and will service their supply distribution center for the Midwest retail outlets. The second industrial start was a 52,000 square foot expansion of our grand warehouse project in the O'Hare submarket of Chicago. For both of those projects the stabilized yields are projected to be in the high 7% range. On the suburban office side, we started another speculative project in our Raleigh Perimeter Park development. Perimeter 3 which is 204,000 square feet is 64% pre-leased. Many of you remember that earlier this year we started Perimeter 2 in Raleigh. Perimeter 2 is now 91% pre-leased and scheduled for delivery in the second quarter of 2014. Our Raleigh team has a strong list of top quality prospects for the remainder of the spacing of these two projects and our existing portfolio of Raleigh is also 97%, so demand is strong. We expect to earn stabilized yields on both of these projects in excess of 9%. Finally our fourth start was a 49,000 square foot on-campus medical office development in Cincinnati. The facility is 100% pre-leased for 15 years to the healthcare system backed by Good Samaritan Hospital, which is a AA rated credit. Our total development pipeline as of September 30th stands at 2.3 million square feet totaling $391 million of stabilized cost and 85% pre-leased. We are projecting a weighted average stabilized yield of 7.9% and average yield over the initial lease term of 8.9%. We’re also pleased to announce we signed another build-to-suit project with Amazon on our industrial ground in the Port of Baltimore. This represents our third building in excess of 1 million square feet that we signed with Amazon in the past 24 months. Construction has already started on that project. Let me conclude on the development side by saying that our development platform is a key growth driver for Duke Realty. We have strategic land bank, exceptional relationships and a reputation in the market that will allow us to continue to create value to our development platform over the long-term. And now I will turn it back over to Denny to cover our recycling activities.

[Denny Oklak:]

Thanks, Jim. During the quarter we recycled our disposition proceeds into two very high quality industrial facilities totaling $38.8 million. The first was a 343,000 square foot modern bulk facility in the I-81 Corridor in Central Pennsylvania. Facility is 100% leased to Kimberley Clark with the remaining lease term of six years and annual rental escalations of 2.5%. The building is five years and designed for today’s modern logistic needs including cross-docking and extra trailer storage. The second acquisition during the quarter was a 110,000 square foot newly build industrial facility in the South Bay submarket of Southern California. The project is strategically located in the New Douglas Park Brownfield redevelopment adjacent to the [Vero] Beach Airport. This submarket has maintained our occupancy levels of over 96% over the last 10 years and currently stands at 98.5% leased. The acquired facility is under a 10 year lease with solid 2% rent bumps. We believe both of these very high quality one-off acquisitions during the quarter represents strong risk-adjusted investments as we continue our asset recycling. Moving to dispositions, during the quarter we sold two non-core properties totaling about $45 million, the largest of which was a 205,000 square foot medical office building located in Northern Indiana which we referenced last quarter. The other property was a small non-strategic vacant industrial facility located in Chicago. The remaining $27 million of disposition proceeds were from land sales. As reference on last quarter's call, we closed on the sale of a 32 acre office land parcel in Washington DC and also sold 33 acres of office land located in Minneapolis, Indianapolis and Atlanta markets. As noted on the last call, we feel very good about executing additional land sales in the fourth quarter for our revised land sales guidance at prices well in excess of book value. I’d like to point out that for the year we sold $465 million of non-strategic properties at an in place cap rate of 6.23% and redeployed those proceeds in strategic acquisitions of $472 million at an in place cap rate of 6.24%. So we have effectively matched up our capital and in place NOI dollar-for-dollar loss substantially increasing the quality of our portfolio and reallocating proceeds to bulk industrial assets. Also on the cash or AFFO basis, these transactions are accretive as the CapEx requirements for the acquired properties are less than the sold properties. We continue to progress on our Midwest suburban office sale. To-date we have $84 million of sales in St. Louis under firm contracts which we expect to close in November. We also have signed letters of intent and buyers are underway on due diligence on about $110 million of properties in Cincinnati, Cleveland and Chicago, which we expect to finalize and close in December. And finally, we’re in advanced negotiations on another portfolio in Cincinnati totaling about a $150 million, which we believe will proceed and likely close in early 2014. These transactions represent the entire portfolio that we marketed. We've also marketed our portfolio of medical office assets specifically assets that were older or less strategic due to limited future development opportunities with the health systems leasing the properties. The portfolio consists of 17 medical office assets totaling about 938,000 square feet located primarily in the Midwest. Portfolio marketed has an average age of 9.4 years compared with our overall medial office portfolio age of 6.8 years. After receiving several strong offers we've recently accepted an offer on the entire portfolio. We're in early stages of due diligence but expect this portfolio sale to close before year-end and expect proceed to be above $250 million. I'll now turn the call over to Mark to discuss our financial results and capital plans.

[Mark Denien:]

Thanks, Denny. Good afternoon, everyone. As Denny mentioned, I would like to provide an update on our third quarter financial performance, as well as the progress on our capital strategy. Core FFO for the third quarter of 2013 was $0.28 per share compared with $0.27 per share in the second quarter of 2013. Core FFO this quarter reflected the continued improvement in portfolio operations, the highlight of which was positive same property NOI growth for the 12 and 3 months ended September 30th of 4.3% and 4.4% respectively. This positive performance due to the strong leasing the last few quarters driving an increase in occupancy across all product types along with growth and rental rates and rent escalations built into our leases. Our growth in overall average net effective rent on renewals was about 2.6% for the quarter. We had very strong growth of 8% on industrial renewals. Our strong current occupancy levels in high asset quality is allowing to push rents in almost all markets on the industrial side. This is the ninth quarter in a row that we had positive rent growth on industrial renewals and we expect this trend to continue as over 50% of our industrial lease expirations over the next 15 months were signed between 2008 and 2011. So we expect significant growth as those leases roll. Not surprisingly, we did experience a slight roll down in the rents on suburban office renewals. We generated $0.22 per share in AFFO, compared to $0.24 per share of AFFO for the second quarter of 2013. Due to the anticipated timing of our lease related CapEx towards the second half of the year related to the occupancy [entrees] just mentioned, AFFO per share this quarter was in line with our expectations. In summary, we are pleased with another strong quarter of operating results and anticipate continued solid execution during the fourth quarter. Now I will quickly recap the capital transactions for the quarter. We repaid six secured loans totaling $77 million, which had an average effective interest rate of 5.6%. In the process, we unencumbered about a $162 million of properties to enhance our financial flexibility and credit profile. As Denny mentioned, we generated $73 million of proceeds from non-strategic asset dispositions during the quarter. Disposition activity outpaced acquisitions for the quarters we purchased two industrial properties for $39 million. We finished the quarter with about $210 million outstanding on our $850 million line of credit, compared to $88 million outstanding on the revolver at June 30. Given our strong expected fourth quarter disposition activity Denny alluded to, we expect to use the proceeds from these dispositions to repay our outstanding line balance and fund fourth quarter development activity. This will put us in a solid liquidity position heading into 2014, not to mention that we don’t have any debt maturities of significance until August of 2014. We achieved improvements in our key leverage metrics during the third quarter as well with the fixed charge coverage ratio now over 2.0 for the rolling 12 months ended September 30, compared to 1.9 for the rolling 12 months ended June 30. Fixed charge coverage for just the third quarter exceeded 2.1 times, which is more reflected of our current leverage profile. I would also like to point out that these metrics will continue to improve over the coming quarters simply by completing our development projects that are currently under construction given that they are 85% leased in the aggregate and the balance sheet already reflects the substantial portion of the cost having been incurred without the benefit of the earnings. I will conclude by saying that I am very pleased that we've continued the strong trend in operating results for the third quarter, we've continued to execute our asset plan and we've completed a few capital transactions to further improve our credit ratios. We're confident we will meet our year-end capital strategy goals that we originally set. And with that, I'll turn it back over to Denny.

[Denny Oklak:]

Thanks Mark. Yesterday we reaffirmed our guidance of FFO for 2013 at $1.07 to $1.11 per share based on our solid operating performance thus far. In closing, after a solid quarter we believe our value creation story is firing on all cylinders with excellent leasing result, improving rent growth prospects, all the asset repositioning and development activities in an improving credit profile. Thank you again for your support of Duke Realty. And with that, we will open it up for questions.

[Operator:]

(Operator Instructions). Our first question, we will go to line of Jamie Feldman. Please go ahead.

[Jamie Feldman:]

I guess the first question is you guys like you are on pretty good tract here fundamentally, why not take the guidance up given that you just kind of kept your range?

[Denny Oklak:]

Well, I would say Jamie, our range is fairly tight with $0.04 you know. You never know when a transaction is going to take you up to higher level in the mid-point. So I think we are very comfortable with just a $0.04 guidance and we only got three more months to figure out what it actually will be.

[Jamie Feldman:]

Okay. And then I don’t how much (inaudible) you can give around Amazon, but can you talk a little bit about the economics in the size and I guess even more importantly what are they doing with that space? And what is the safer kind of future demand and especially demand from that kind of tenant?

[Denny Oklak:]

Let me start by saying, we really can’t talk much about obviously with confidentiality agreements with Amazon as far as many details of the overall transaction. When we report our fourth quarter activity what we can disclose would be included in that. And Jim why don’t you talk about a little bit about the nature of the facility and what we’re really seeing in the e-commerce area to that.

[Jamie Feldman:]

I am not sure, Denny,

[Jim Connor:]

Well, I am sure most of you are aware of e-commerce continues to grow dramatically. We’ve all seen the projections, currently comprises 9% of retail sales and is projected to go north of 20 in the coming years. That is obviously fueling a great deal of warehouse demand. Amazon continues to lead the charge with the large million square foot facilities. By and large they are all generally build to suits. They are all fulfillment centers of some sort. They are also engaging in some smaller facilities. We are starting to see come around the marketplace. We have not completed any of those, but I think you will see in addition to Amazon you are starting to see a lot of other major retailers move into dedicated e-commerce distribution facilities. The other buzzword that we are seeing around the industry is on the channel distribution centers where major retailers are distributing to their stores and supporting online, although the same warehouse. So that’s a growing trend that we are seeing as well.

[Jamie Feldman:]

And then I guess how do we think about, you said maybe also have some smaller ones you are looking at, I have seen that for the same and next day delivery. What are you guys seeing in terms of that pipeline and are you positioned for it with your land bank or is that actually more of an infill story?

[Jim Connor:]

No, I think we believe we are pretty well positioned for that. I don’t -- we are not aware that any of them are what we would call true infills in major metropolitan areas. I think they are looking at more traditional distribution locations, just small or more typical traditional distribution centers for this large million square footage.

[Denny Oklak:]

And Jamie, I think that these -- we are never quite sure as close to these customers of ours are fairly tight lift about exactly what they are doing out (inaudible) facility, but I think we would suspect that lot of those facilities are for the smaller facilities by smaller 250,000 to 500,000 square feet are for local same day delivery.

[Jamie Feldman:]

Okay. And then finally, I know you mentioned in general you don't think supplies are really as you get, but are there any markets for you are starting to get concerned. I know when we see the data on Indianapolis, that's one we're certainly expecting to be, we expect pipeline tend to be growing pretty quickly.

[Denny Oklak:]

Jamie, I would have told you that it was a concern in the second quarter, because we had half a dozen buildings out there and the activity was below what we would traditionally expect in Indianapolis, which has historically been a very strong distribution market. Activity in the late third quarter and fourth quarter has been very, very good. I think everybody will be very positively surprised. We do not expect space to comes off the market the next time we're having this conference call.

[Jamie Feldman:]

Are there any other markets that you're watching as riskier?

[Jim Connor:]

No Jamie, I don't think so. We just updated our third quarter analysis and I would tell you while we watch all of our markets very closely with a number of projects the square footage and the percentage leased, we look at historical levels and all of the spec it's under construction in the U.S. and still only about a third of what we ran at for levels in 2005, 2006 and 2007. No market is exceeding 2% of its overall industrial base. So we still think the market are pretty good balanced, most of them are actually less than 1% of the total industrial base. So that’s a very manageable number for most of these markets given our annual absorption. So will continue to be moderate, but since year-to-date we don’t think the spec development is impeding the safety in any of our markets.

[Jamie Feldman:]

Okay, great. Thank you.

[Operator:]

Thank you. And we will go to Dave Rodgers. Please go ahead.

[Dave Rodgers:]

Yeah. Denny, obviously you talked about kind of swapping better NOI for what you’ve been selling and you’ve done a good job matching that up to this point you’ve got $400 million kind of plus coming into the fourth quarter. Do you have a agreed view to proceeds as you sit today and kind of being able to match that up, is that going to development, is that going to the balance sheet? Can you kind of talk about some of that uses that add any potential dilution in the timing of getting that back out to work?

[Denny Oklak:]

Yeah. I’ll let Mark have it.

[Mark Denien:]

Yeah. I’ll start on that Dave and then Denny can chime in. If you think about give or take $400 million, $450 million proceeds Denny just talked about coming in, in the fourth quarter we have got about two tenant outstanding on our line which is really used to fund third quarter development for the most part. So we’ll take half of those proceeds give or take and pay that line balance off. And we’ll be able to fund our fourth quarter pipeline across which is probably close to another $150 million. So that we’ll use most of it up there. And then we may end up the year which is the little bit of cash that’s basically prefunded our early 2014 development.

[Dave Rodgers:]

And then I guess maybe moving over to the office renewals, Jim I think you’ve mentioned in your comments and maybe to Denny, but better Jim, with regard to the renewals that you did Indianapolis I know you talked about Cincinnati as well. Was that the benefit from consolidation at all? Was there any downsizing in leases or are these kind of as these leases and just kind of rolling the market?

[Jim Connor:]

No. I would say actually it’s all really positive news. Most of these companies more in the financial services, insurance healthcare services business and we didn’t lose ground with any of these tenants. All of these tenants remained as is or several of them were actually cooperating some slight bit of expansion in there. So it’s just the continuation of the good performance of our office portfolio this year. I think we are all very pleasantly surprised to see our office occupancies continuing to grow, given where we are with the overall economy. But the news is good we’re all fairly optimistic about that continuing to get better as we move, rolled in the fourth quarter and then into 2014.

[Dave Rodgers:]

Last question on the maybe call it secondary office market sales, you talked about or what’s under contract, what’s I mean better demand today for some of those assets? Are you seeing a broader buyer of pools including institutions kind of maybe dipping into the market a little bit more or is it a function of financing, just a little bit more color on that would be helpful? Thanks.

[Denny Oklak:]

Dave, we began marketing that portfolio early summer, late spring, early summer I would say, probably towards the end of May. And we’ve had good activity all along, what has just taken probably a little longer than a normal transaction on this is really splitting the portfolio up in the multiple buyers and just takes longer. And we’ve done that, so really try to maximize proceeds and I think that’s really what will happen as we complete these transactions. The demand has been good all along, I would say. In this particular portfolio I wouldn’t classify the buyers as institutional investors. More private equity type buyers getting financing. Financing is readily available for these projects since, through the last few months the interest rates really have stabilized on the borrowing that folks were looking at. So again I just think there is sufficient demand out there for all types of real estate and a pretty varying buyer pool. But the buyer pool on these properties on the Midwest suburban office side has really been private equity firms. Then on the MOB side, we have very strong demand for that portfolio and it is obviously more institutional investors and we had a lot of offers on that portfolio and what I would say a pretty tight range. So we are very pleased with the results on that portfolio. And again on the MOB side, this is a few of our older assets in there. So I think overall with this disposition we are improving the overall quality of the MOB portfolio that we will hold going forward.

[Dave Rodgers:]

Thank you.

[Ron Hubbard:]

Thank you Dave.

[Operator:]

We will go to line of Josh Attie. Please go ahead.

[Josh Attie:]

Thanks. Can you give us a sense for the average cap rates on the $350 million of office sales and $250 million of MOB sales?

[Jim Connor:]

Well I since our closing in all these different transactions I would rather wait and give you those at the end of fourth quarter, Josh, when we get them closed. So, but I will say they are in-line with what we have been talking about on the Midwest office portfolio and really as well I think long they are in-line with the cap rates that we have been talking about on the MOB portfolio.

[Josh Attie:]

Okay. And then on use of proceeds, it sounds like the $450 million that’s coming in the door fourth quarter is to the bid online the credit and fund development. What’s the reinvestment plan for the remaining 150, just to help us understand what the earnings impact will be on 2014?

[Denny Oklak:]

I will say most of that, will be redeployed back into the ongoing development pipeline. We have got a pretty strong development pipeline, which just got bigger with the signing of the Amazon project in Baltimore. So, we’ve got plenty of use of those proceeds they will really redeploy pretty quickly.

[Josh Attie:]

So, you think, I mean just to think about the your entire $600 million that you’ve talked about selling all of that will go to either pay down on line of credit and fund development, none of that we should expect to go to acquisitions?

[Denny Oklak:]

Well, I think we still got an active acquisition program going on, it’s been relative, I would say compared to what we’ve done over the last couple of years has been relatively slow here more recently with the fewer large portfolios out there. But we’re still in discussions on some one-off type projects, basically on the industrial side. And so I think you’ll see as continue to have a few of those each quarter.

[Josh Attie:]

Okay. And then on the acquisitions that you made at Central Pennsylvania and Southern California it looks like you paid a 5.5 comp and the assets are fully leased. Can just talk about what kind of returns you’re projecting on these deals and sort of how you get there, is it a planned rent growth or do you think that cap rates for these assets compress further?

[Denny Oklak:]

Well I would say it’s a combination of few things. And first of all I would say what we’re continuing to do here is take our disposition proceeds and generally redploying back into acquisitions which is same strategy we’ve had for the last two to three years. And so with us it’s a matching of dispositions and acquisitions. And as I mentioned in the prepared remarks when you look at this year-to-date it’s almost incredible that we’ve ended up with almost the same amount of dispositions and acquisitions that almost exactly the same cap rate. And what we’ve been able to do as we’ve done that is put proceeds back into what we believe are really I think a good cap rates, probably better than market cap rates on very solid industrial properties that are in key distribution markets long-term growth markets for us. And I would say the acquisitions have two characteristics. One is nice rent growth and the existing leases that are in place as well as being located in markets where we think we’re going to have good longer-term rent growth there and ultimately have good rent growth when the leases expire. And one other thing I want to keep pointing out that I’ve said on the calls before and in our discussions with you all is, in most of these block buildings that we’re buying, not all of them, but a lot of them are single tenant buildings, which is really the bulk business and you either buy these things a 100% leased or you buy them zero percent leased. We typically have tried to buy zero percent leased buildings because we want to zero percent lease building will build a spec building on some of the great industrial ground that we have. So you just don’t find that many portfolios out there that are 80% or 85% or even 90% leased, they are either zero or 100. And so that’s why you we see us buying a out of those 100% leased buildings, but again focusing on a key distribution markets with good long-term rent growth profile.

[Michael Bilerman:]

Hey Denny it’s Michael Bilerman good afternoon. Just two quick questions, one was just as you think about selling 250 million of medical office, of course it’s 20% of the medical office portfolio before you bring on forth any new development. Was there sort of a strategic relook at potentially hiding it off completely and really holding in on being a much pure industrial player as you continue to sell off suburban office and how much time just given the cap rates ever being paid for medical office and some of your peer also going through some of that refocus, did that take off your attention?

[Denny Oklak:]

Well, I would tell you, this portfolio Michael that the whole strategic reason for selling this portfolio was, it was just some relatively older assets, a couple that we bought from some major customers of ours over the years as well as some of the development we did early on in process of building this business including some that occurred back and like development that started back in ‘04 ‘05, ‘06 before we even brought Jim Bremner and his team fully into our company. And the other piece of it was these were generally with hospital systems where we don’t see a big future expanded relationship. And like you noticed we haven’t sold anything with Baylor and some of the major customers that we have around the country. So it was just a strategic look at the portfolio, it’s a some money off the table and what we believe, I am not disagreeing, but it’s a good time to sell these properties and there is fairly high demand, as I mentioned we have very strong interest in this portfolio. So that was really the goal and right now we have got pipeline roughly equal to what we are selling and we think that pipeline is going to continue to be stable on MOB development business. So we are just looking to take those proceeds and redeploy them back into the MOB business going forward.

[Michael Bilerman:]

And then the Amazon stuff I remember one was in the [CBRE] venture. I don’t know if that got redistributed do you wholly own the other one that you have and then I guess this will be wholly owned Amazon facility as well that you are building in Baltimore?

[Denny Oklak:]

We have three. One in Delaware just south of Philadelphia that we’ve finished late last year. We have got one in Seattle that we finished just couple of months ago during this last past quarter. And now we’ve got this one that we’re starting in Baltimore. But we’ve also got an Amazon and a lot of other facilities. And the answer is yes, they are in a couple of facilities in our Chamber Street joint venture, one in Indianapolis and one in Phoenix. And then again, we have, I mean a number of other the spaces around the system. So, I think you’ll see Amazon in the next quarter, actually tick up to be our largest tenant in our overall portfolio.

[Michael Bilerman:]

Got it. Okay. Thank you.

[Denny Oklak:]

Thanks Michael.

[Operator:]

And we have a question from Blaine Heck. Please go ahead.

[Blaine Heck:]

Thanks. Denny, I just wanted to see if we could get some commentary on how we should think about occupancy gains going forward? You guys have done a good leasing up the portfolio. But looks like the majority of additional leasing will need to be done in the suburban office portfolio. So, is there anything you can point to that gives you confidence in your ability to continue to show occupancy growth in the fourth quarter and into ‘14? And maybe where do you think you can ultimately get that lease rate up to?

[Denny Oklak:]

Well, let me start on that and then I’ll let Jim chime in also. Because, I would say, first of all on the suburban office, yeah, you are right. I think we got a good chance to see our occupancies continue to grow there and I think with any lock in the economy, the growth in the occupancy in that portfolio could accelerate. And some of that, there is a little volatility in suburban office occupancy rate for us, because of our disposition programs. So, some of it depends on what we sell. Like for example, the portfolio that we're marketing that I talked about in all these pieces and parts is overall about 93% leased, so little bit higher than our average occupancy. And then on the medical office business, there is I think there is still room to grow. Today a lot of the development that we're starting is 100% preleased by the hospital systems. But we still got a little bit of vacancy and some of that is some vacancy we built or bought in the portfolio, but really I would say that that’s, the medical office portfolio run above 95%. So I think we've got another 150 to 200 basis points worth of growth in that portfolio. And then I mentioned, we mentioned here that the large bulk distribution piece of our portfolio was that our 40% of it is fairly highly leased at about 97%, but I think there is some room for growth than the other piece of that portfolio. And Jim maybe you’d comment on that and what we're seeing in that piece of the portfolio.

[Jim Connor:]

Yes, sure. The comment I would make and we've been asked this question a couple times before how much upside that we really have. I think if you go back and look at historically, we brought our industrial portfolio as high as 95.5. So I would tell you that we've got a little bit more upside in the industrial portfolio, not a lot of it is in the big boxes because over 500,000 square foot buildings in our portfolio are about 98% leased today. So most of that improvement is going to come in, in the midsize to 100 to 500 under 100,000 square footers, but [versus] was good operators we've ever been and I would like to believe we can continue to get back to where we draw that historic levels. And I think at the same time that will take us a little bit longer. I think the same could be said in the office. We’d historically run that office portfolio in better times in the low 90s. So while the office market is not, the overall office market is not as good as it was a few years ago, I’d like believe we’ve got lots of upside there as well.

[Blaine Heck:]

Great. That's helpful. And then on same-store NOI you guys are at 3.5% year-to-date given that you are going to be starting to compare against some pretty occupancy level. Is it fair to expect that that specific is going to moderate a bit in the coming quarters?

[Denny Oklak:]

Yeah, Blaine we’re at 4.3% year-to-date all in on a 12 month versus 12 month. And our original guidance for the year is in the 1% to 4% range, we’re still pretty comfortable with that. So I think that we still expect some growth as we move forward, but it should moderate probably a little bit as we close out the year given the higher occupancy base we are working those. So it will probably be in that in the 3% or maybe north of that range a little bit, but still in that 1% to 4% for the year.

[Blaine Heck:]

Okay. And then last one from me, your development pipeline, it looks like you are expecting some relatively high yields from the projects you started during the quarter. Is there anything that’s driving your ability to target the higher yields and do you think that's going to be sustainable in the near to mid-term?

[Denny Oklak:]

Well, two things I would say is, one, our overall yields are higher because overall we’ve started some office development during the year and particularly during the quarter. And just typically our office yields are higher than industrial yields and we all pretty much know why that is. And again the other piece is a lot of it’s, obviously a lot of this development is going on ground that we own and ground that we may have owned for a while and have good bases in for example the Columbus ground that we have for the industrial build-to-suit. So typically if we have got a good ground with good bases, we’re going to get higher overall yields. And that I guess I would also say that it’s hard to predict because of that because you don’t know exactly what kind of development you are going to see going forward whether it will be some more office on some of the office ground we have left or whether it’s a build-to-suit in one of the major markets where the cap rates are lower and there is more competition. So I think it’s just really, the overall cap rates on the development just depends on the mix and the geography.

[Blaine Heck:]

Great, thanks.

[Operator:]

We have a question from Rob Stevenson. Please go ahead.

[Unidentified Analyst:]

Yes. Can you guys talk about what the impact is going to wind up being on the occupancy in the suburban and medical office portfolio on the sales, the assets you are selling higher or lower occupancy or roughly similar to what the overall portfolios are?

[Denny Oklak:]

Well, I mentioned on the Midwest office sales, it’s about 93% leased so it’s a little bit higher than our overall occupancy at 87% plus. So that would have a tendency to pull that occupancy down a little bit, I'm not sure it's going to go down, but just if you look at that sale it would. On the [MOB] that portfolio has got 97% leased. And I think our overall portfolio is around 94%. But it's, again it's only about 10%, 12% I guess of the overall portfolio. So I don't think it will have much of an impact.

[Unidentified Analyst:]

Okay. And then you guys have been averaging about $100 million of draw in starts thus far in ‘13. What's your sort of tolerance at this point, what you're seeing in your individual markets to ramp that up materially, as well as what's your tolerance these days to start additional spec developments?

[Denny Oklak:]

I think I'll comment overall and then I'll let Jim come on what we're seeing on the spec side. But I think right now we sort of target a range ongoing development in I’ll call it [bias] at $700 million range, we don't really want to get much above that, just turns into rating agency issues and others. And the truth is I don't think we feel like we have a lot of opportunity that we’d exceed that here right now. One of the things we focused on is the build-to-suit activity because we're sort of in that sweet spot especially on the industrial side of build-to-suit activity where our customers have time to grow their business by doing build-to-suit activity and we’d just assume to do that. And so we’re focused on that. And of course as I mentioned, the MOBs have been virtually all 100% leased projects too. So we've kept that portfolio up in the 85% to plus percent range leased because it’s under development. And Jim why don’t you comment on the spec side of the business and what you’re seeing?

[Jim Connor:]

Yeah. I would add to Denny’s comments, while we've got a few spec developments underway and we're starting to see some leasing some of those projects so they’re coming along nicely, I will tell you our build-to-suit pipeline is so strong that we really rather than continue to focus on that so that when those buildings come into service they’re having an immediate positive impact. As I said earlier, we monitor all of our markets, look at all spec development. Nationwide our markets we're looking about 20% preleasing, we're leasing on all of spec at least that we're seeing across. So we're not seeing great leasing demand for spec space so that combined with the amount of build-to-suit opportunities has really led us to kind of stay the course of being a little bit cautious about spec and continue to focus on the build-to-suits. I think as Denny said we're very comfortable that we want to meet our budget goals and our guidance this year. And if we can do that and continue to focus on build-to-suits where we've got 85% of the portfolio preleased, I think we're creating a value that way.

[Unidentified Analyst:]

Okay. Thanks guys.

[Denny Oklak:]

Thanks, Rob.

[Operator:]

Then we’ll go to Eric Frankel. Please go ahead.

[Eric Frankel:]

Thank you. Maybe touching on Michael Bilerman’s question, it seems you have a very good relationship with Amazon. Just curious given your recent projects in Washington and Delaware and that was one incorporates, it seems like your facilities are getting increasing specialized especially the revolving infrastructure, would it mean tearing the bottom sales. There are two questions, what your thoughts on the tenant concentration issue, as you mentioned, they’re going to be the largest tenant? And then two just specialized nature of a building and if that is not so commodity like, like a typical big box? Thanks.

[Denny Oklak:]

Yeah. So first of all as far as Amazon goes, it will be our largest tenant, but it’s only going to be like somewhere between 3% to 4% of our overall revenue, so we’re not too concerned about just looking at Amazon. The second thing is, as you guys, if you follow the industry, I am sure you’ve seen it, Amazon is really built facilities, virtually all over the country. And what we try to do is concentrate our business with them and as much as we can in the major distribution markets and as well as on our land when we can do that. And I think we’re very comfortable with the projects that we’re building from a long-term perspective. First of all we’re signing generally 15 year leases on this with Amazon, but we’re also very comfortable with these projects on a long-term basis because of their location and because of the kind of building they are.

[Jim Connor:]

Eric you’re correct that generally speaking we’re seeing Amazon do some specialize investment in these projects, but under the terms of the lease that just it just really isn’t an issue to us. So we’re looking at these buildings as being a, Amazon were to leave at their lease term, these are buildings that generically buildings that generically we can turn back into a just a normal distribution center and they are located in good distribution markets.

[Eric Frankel:]

Okay. Thanks for the proper response. The other question I have on the suburban office sales, it seems like they are selling little bit more than you initially projected a quarter ago. Can you just comment on a square footage that you are likely going to be selling in each market?

[Denny Oklak:]

I don’t have each market in front of me, it’s a total of about 2.3 million square feet and I think there might be another couple of hundred , thousand square feet that we are selling out at the Chambers Street joint venture. So I think it’s right in line with exactly where we thought we were going to be when we start is six months ago.

[Eric Frankel:]

Okay, thanks. And then my final is just regarding your land type plan even you feel like you have pretty good activity in that perhaps you can monetize that with additional build-to-suits maybe if you could just provide a timeframe of your land monetization outlook?

[Denny Oklak:]

Well, I could say the couple of things that’s happened with the overall land pipeline. First of all, the development business has accelerated over the last 18 to 24 months pretty significantly. So we’re able to put more land into service through the development pipeline. And I think this year we are going to be probably somewhere in the, I don’t have again the exact number in front of me, but $35 million to $50 million of land put into development. And then the other piece is we’ve really seen an increase in our ability to sell some land this year. And most of the land we are selling is land that was, two things, one originally designated for sale back a few years ago, we went through the whole portfolio. Or second land is that was originally entitled for us for office property, haven't sold much of any on the industrial land side. And a lot of that office land sales is gone to other usage really to residential or even some retail that we see and will see. So I think overall the pace of us moving through our land inventory has accelerated quite a bit over the last 24 months. And so, generally speaking, we feel very good about the land inventory that we have today and where we stand. And as I mentioned on the call, we've got industrial land that we can do over 50 million square feet of new development on. So hopefully, we'll continue to get a lot of the build-to-suits and in the case when spectrum moves through that.

[Eric Frankel:]

Just one final question, regarding the Medical Office portfolio, could you quantify that either on-campus or off-campus?

[Denny Oklak:]

This portfolio that we're selling is above, I think it's about 85% plus on campus.

[Eric Frankel:]

Okay, great. Thank you

[Denny Oklak:]

Just kind of nears or rest of our MOB portfolio.

[Eric Frankel:]

Okay. Thank you

[Operator:]

We go to line of Michael Salinsky. Please go ahead

[Michael Salinsky:]

Just a couple of quick follow-ups. As you think about the build-out in for other land pipelines for ‘14 and ’15 and have you started to looking at taking out additional land at this point?

[Denny Oklak:]

Generally not, we bought one parcel in Houston earlier this year up in the Northwest side because we didn’t have any land. We developed all our land on the industrial side there. Jim, I don’t think we've really bought any other land this year, have we?

[Jim Connor:]

No, Denny. We've got more than a few inventory in most of our markets, so we've got additional capacity. We’ll continue to look at things, but I think we've got little ways to go before we back actively in the land market.

[Michael Salinsky:]

Second question you gave a lot of color on pricing growth in the Medical Office and in suburban office. So, can you just talk a little bit of the bulk industrial, whether you've seen any change with the movement in industry over the last call it 90 to 180 days?

[Denny Oklak:]

I got to tell you, we really have it. I am little surprised, but I think when you look at, at least the market where we're playing in, in industrial we're looking at the major distribution markets and a Class A modern both properties. Most of the buyers are not leveraged buyers, they’re institutional investors in that a product type. So we quite honestly have not seen much movement at all in the cap rate in the bulk industrial side.

[Michael Salinsky:]

And then just final question on the asset sales that, how much leverage is in place on those currently?

[Denny Oklak:]

Virtually none, I think there is a couple small ones on the Midwest office portfolio and then not much at all though.

[Michael Salinsky:]

Thank you much

[Operator:]

We’ll go to line of (inaudible).

[Unidentified Analyst:]

Just a quick one for me. You sounds working on plan, I mean too much in acquisitions over the next couple of quarters. Is that reflected of what you are seeing in the market, is it tight supply of prices above what you would like to pay, can you provide me a little color there?

[Denny Oklak:]

Yeah. I would say the two primary drivers of that, one would be just what’s out there and available at the market. Generally speaking we haven’t -- it’s been I would say a little bit slower on the disposition market over the last probably six months and I think some of that has to do with sellers looking at what the interest rate increases were going to do to cap rates. So that the people held back a little bit on selling. Second, again go back to our plan is to on the recycling side is to match up dispositions with acquisitions and we've got some dispositions going, but as we talked earlier in a couple of questions that were asked, we've redeployed most of those proceeds in either into acquisitions that we've completed or into the strong development pipeline that we have. So some of it is just really also what's out there in the market and we’ll see what happens over the next couple of months. I would anticipate much coming out between now and year-end, but would take may be at the beginning of next year things hold stable. We would see a larger supply, then we’ll just see if there is something that’s with us strategically.

[Unidentified Analyst:]

But overall you would be open just currently there is nothing there target that?

[Denny Oklak:]

Yeah, that’s what I would say [Brandon].

[Unidentified Analyst:]

And then on the recent spreads on the industrial portfolio going forward, I think you mentioned that about 50% of the leases that are rolling in the next 15 months were signed 2008 to 2011, what can we kind of expect from recent spreads on that part of the portfolio?

[Denny Oklak:]

Well, I think if you were to look at that 50%, I will let Jim tick me on this one, but I would say probably you are looking at 15% to 25% say in rental rate increases on average on just those leases. So I am not saying overall we’re going to have 20%, 25% rent growth, but I think if you look at those leases that are rolling as we go, something was signed in 2008 or 2009 we’re probably looking at 15% plus rent growth on those at today’s rate again in most of the markets. Jim, do you think that’s about right?

[Jim Connor:]

Just set floor for me. No, guys, I think that is right. I think when you look at the leases that are rolling in and when they were signed in some of the softer times combined with where our occupancies is, our mission has been and will continue to be to push rents.

[Unidentified Analyst:]

Well that’s great. Thanks a lot.

[Operator:]

(Operator Instructions). And at this time, there are no questions in queue. Please continue.

[Denny Oklak:]

We appreciate everyone for joining the call today and look forward to seeing many of you at the NAREIT Conference in San Francisco in a few weeks, or if not, we will reconvene during our fourth quarter and year-end earnings call tentatively scheduled for January 30. Have a Happy Halloween and thanks again.

[Operator:]

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