Duke Realty Corporation
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Ladies and gentlemen, thank you for standing-by and welcome to the Duke Realty fourth Quarter end year-end 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. Now, I would like to turn the conference over to Mr. Ron Hubbard, VP, Investor Relations, Please go ahead.

[Ron Hubbard:]

Thank you. Good afternoon, everyone and welcome to our fourth quarter earnings call. Joining me today are Denny Oklak, Chairman and CEO; Jim Connor, Chief Operating Officer; and Mark Denien, Chief Financial Officer and Nick Anthony our Chief Investment Officer. Before we make our prepared remarks, let me remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you to our December 31, 2013 10-K that we have on file with the SEC. Now for prepared statement, I’ll turn it over to Denny Oklak.

[Denny Oklak:]

Thank you Ron, good afternoon everyone. Let me start by saying that 2014 was another excellent year for Duke Realty. We met or exceeded all of our beginning of the year goals and capped off the year with an excellent fourth quarter. In light of the suburban office disposition we announced yesterday, today's prepared remarks will focus on the sale along with our 2015 guidance and we'll provide limited highlights of the fourth quarter in 2014. So, now on to the sale. We just agreed to sell portfolio suburban office properties totalling 6.9 million sq. ft. and 57 acres of undeveloped land. An affiliate of Starwood Capital Group in a joint venture with affiliates of Vanderbilt Parkers and Trinity Capital Advisors agreed to purchase the portfolio for $1.12 billion. The 52 billion portfolio includes all of the company’s wholly owned suburban office assets in Nashville, Rowley, South Florida and St. Louis. One of the buildings in Rowley is currently under construction. The in-service portfolio is 91.6% lease and the buildings have an average age of 15.5 years. The portfolio is covered by only $40 million of secured debt that will be paid off at closing. Buyer will assume all the leasing and property management responsibilities upon closing. As far as the transaction, company will provide seller financing of $200 million in the form of a first mortgage and a portion of the underlying properties, which will bear interest at LIBOR plus 1.5% and of a maturity date of December 31, 2016. The note will be prepayable without penalty beginning in January of 2016 and will be collateralized by properties with an approximate 75% loaned value. Closing in a transaction is subject to certain customary conditions and is expected to occur on or about April 1, 2015 except for the one property currently under construction, which is expected to close upon completion late 2015. This transaction will result in a book and tax gain and is possible that there is special dividend may be required but it is too early in the year to predict with any certainty whether or how much that might be. We will implement various tax planning strategies to minimize the impact of this transaction, but [indiscernible] with a redeployment of this capital. I would remind everyone that we have about 750 million of dispositions in 2014 with only a 131 million of acquisitions and we still do not have any special dividend requirements. I also want to point out that although this transaction will be added to FFO in the short-term, it has minimal impact on AFFO and after the sale we will be positioned with an improved portfolio in a much stronger balance sheet to enable future growth. Now, let me quickly recap our outstanding year. We are selling 25 million sq. ft of leases which is very impressive given our all-time high occupancy levels. We improved in-service occupancy to 95.3% from 95.2% at a prior yearend and we grew same property NOI of strong 4.4%. We commenced 563 million and new development starts, acquired over a 131 million of industrial and medical office properties and completed 736 million in dispositions. We issued 300 million of unsecured debt at a yield of 3.9% and we redeemed all of our outstanding preferred stock totalling 448 million, which had a weighted average dividend rate of 6.57% and we raised 289 million of common equity during the year, which we used to fund our development pipeline and significantly improved our overall leverage profile. We continued our solid execution of asset recycling, we sold 212 million of assets during the fourth quarter, this was comprised of 13 buildings across 10 transactions with a mix of suburban office, older industrial and one of our last remaining retain projects, all primarily located in the Midwest. For the full year proceeds from asset and land sales were 736 million and 37 million respectively, both near the high point of expectations from the year. Similar to previous years, the proceeds from these dispositions were accretively recycled in the development projects and leverage reduction. In summary, we are very pleased with our 2014th operating results and our capital recycling efforts, which further strengthen our portfolio and balance sheet. Now, I’ll turn it over to Jim Connor to give a little more color on our leasing activity and development pipeline.

[Jim Connor:]

Thanks, Denny. Good afternoon, everybody. As Denny mentioned, we had a solid quarter in leasing with over 4 million square feet executed and we also commenced $144 million of new development starts. Our overall in-service occupancy ended the year at 95.3% steady from the third quarter and up a 110 basis points year-over-year. These strong fundamentals have contributed to year-over-year net effective rent growth and sign renewals across the entire portfolio of 11% in the fourth quarter and nearly 9% for the entire year. With respect to leasing our in-service industrial portfolio all of that four of our 22 industrial markets are over 90% leased and 15 are over 95% leased with an overall occupancy level of 96.4%. Our medical office portfolio continues to produce strong results with approximately 460,000 square feet of leases signed during the year, ending the year with overall occupancy at 94.4%, a 60 basis points improvement over a year in 2013. Turning to development, we started 25 new projects during 2014 totalling $563 million and projected stabilized costs. Solid results, which met our expectations coming into the year. For the fourth quarter we started a $144 million of projects across 7 deals with a big quarter from our medical office, which I will expand on in a moment. It always started 640,000 square feet in the fourth quarter, with an expected initial stabilized cash yield of 8.2% and a weighted average gap yield of 9.2%. Regarding a few specific development deals we started a 206,000 square foot, 47% pre-leased industrial project in Houston adjacent to the cargo area at the International Airport. Our medical office platform had a fantastic quarter with four new starts totalling about 200,000 square feet. All four projects are a 100% preleased for 15 years to high quality health system including AMERIS, Centerre, and TriHealth. Looking forward we have a very strong development pipeline for 2015. Finally, we started a speculative suburban office project in Broward County, Florida, at our Pembroke Point Park totalling 144,000 square feet. There are very limited blocks the class A space available in this market. So, we believe it was a strategic time to monetize part of our office land and create some value with development. Also note, we expect high single-digit to double-digit returns on this project. Including the solid fourth-quarter activity, our development pipeline at year-end is over $498 million, with a weighted average stabilized initial cash yield of 7.4%, and a GAAP yield of 8.1% and is 58% preleased in the aggregate. I would also like to note that during the fourth quarter of 2014, we conducted a comprehensive review of all of our landholdings. At the conclusion of this review, we recognized $25 million of impairment charges on additional 583 acres with a basis of a $130 million of our land bank that we had previously planned to develop and now plan to sell. The land that was re-designated was office land, but there were a few industrial private parcels in some markets, where were we had to determine we had excess supply. So, at December 31, 2014, we own 1144 acres of land that we intend to sell with a basis after considering all of the impairment charges of a $185 million. It should be noted that the estimated sale price of a significant portion of this land is higher than its basis, but we are not allowed under accounting rules to write up land to its estimated fair market value. Our development land inventory, including our share of joint venture land at December 31, 2014, totals 2077 acres with a basis of $384 million. This development land can accommodate over 36 million square feet of primarily industrial development. Now, let me turn it over to Mark to discuss our financial results, capital plans, including the use of proceeds from the proposed $1.1 billion portfolio sale and guidance for the upcoming year.

[Mark Denien:]

Thanks, Jim. Good afternoon, everyone. I am pleased to report that core FFO for the quarter was $0.30 per share compared to $0.29 per share in the quarter 2013. Core FFO for the quarter was positively impacted by $574 million up 85% preleased development projects that were placed in service during the year, as well as continuing improvements, and virtually all operating metrics in core portfolio. These improvements were somewhat offset by lower income from service operations and an increase in general and administrative expense, both of which were anticipated. We reported Core FFO a $18 per share for the full year, compared to a $10 per share, from 2013. This 7.3% growth over 2014 is impressive when considering the significant property sales and substantial deleveraging that we accomplish during 2014. I am also pleased to report AFFO of $0.96 per share for the full year and $0.21 per share for the fourth quarter of 2014. Second-generation capital expenditures were relatively consistent between the two years and growth in AFFO over 2013 was mainly attributable to the same strong operating results that drove the growth in Core FFO. In summary, we outperformed expectations for all key operating metrics that we established at the beginning of 2014. And we expect continued solid operating fundamentals in 2015. Now, I will quickly recap the capital activities for the quarter. As previously announced in November, we took advantage of continued low interest rates and issued $300 million of unsecured notes, which had a stated rate of 3.75% and an effective rate of 3.9%. I would note that we issued the stat before we entered into detailed discussions on a suburban office sell we just announced. During the fourth quarter 2014, we redeemed all remaining amounts of both our 6.5% Series K preferred shares and 6.6% Series L preferred shares for a total redemption of $333 million. These redemptions when coupled with the third quarter redemption about $96 million, up 6.65% Series J preferred shares will result in an ongoing annual reduction to preferred dividends of over $29 million. And we now have no preferred stock outstanding. We ended the year with $106 million outstanding underlying credit. We expect to pay our line down in early 2015 using the proceeds from near-term dispositions, including the plan of Midwest industrial portfolio that we discussed last quarter. Even without considering the larger suburban office portfolio disposition, our pipeline of dispositions for early 2015 is strong, and we expect to be able to cover our first quarter debt maturities and development needs with the proceeds from these dispositions. Now, let me touch on some of the assumptions related to the suburban office portfolio disposition that we announce yesterday and its impact on earnings and leverage metrics. I will remind everyone the relevant details of this transaction are included on a separate presentation in the investor relations section of our website. After consideration of the $200 million of seller financing, net proceeds are expected to be about $900 million. We intend to use the majority of these proceeds to de-lever further through debt repayments as well as to fund our develop pipeline throughout the remainder of the year. We have almost a $177 million of secured debt maturing in 2015 at an average interest rate of 4.2%, and we have $250 million of unsecured debt maturing in February of 2015 and another 600 million of unsecured notes maturing through early 2017, with an average interest rate of 6.1%. There would be prepayment penalties associated with most of this debt, but to accomplish deleveraging it is likely we’d prepay somewhere between $500 million to $700 million of debt. This would still leave us with ample liquidity to cover capital needs for the remainder of the year and also significantly improve our overall leverage profile. We expect that our run rate for fixed charge coverage should be close to 3.0 times by yearend. Our debt to EBITDA should be 6.5 times or lower by year-end and debt to gross asset should be in the low 40% range. Now I will turn the call back over to Denny.

[Denny Oklak:]

Thanks Mark. Now turning to our 2015 outlook, yesterday we announced a range for 2015 FFO per share of a $12 to a $20 with a midpoint of a $16 per share and AFFO per share of $0.96 to a $4, with a midpoint per share of a $1. This considers the effect of the suburban office portfolio sell we announced. First from a macro perspective, we expect the economic environment in 2015 to continue at about its current pace, and continued solid real estate fundamentals which are reflected in the guidance. A few specifics and some of the anticipated key performance metrics outlined on the 2015 range of estimates page provided on our website are as follows

[Operator:]

[Operator Instructions], our first question is from the line of Jamie Feldman. Please go ahead.

[Jamie Feldman:]

Thanks, good afternoon. I guess just focusing on the portfolio sale, can you talk a little bit about the decision to sell those particular markets at this point? It seems like the Sunbelt's doing pretty well, we're seeing corporate relocation activity. I'm just wondering, in your internal debates, how you thought about holding versus selling and why now?

[Denny Oklak:]

Well, I think if you look at just our overall strategy, we have continued to downsize our suburban office portfolio. We set out a goal a number of years ago to get that to 25% and we reached that at the end of last year. And so we've been really, I would say, very selective on what we were trying to sell. And I think when you look at those markets, Jamie, I would agree with you clearly, places like Raleigh and South Florida and Nashville also have held up very well and done very well in comparison to some of the other markets that we've been in the Midwest, some of which we sold out of a couple years ago in the other large sale we did. But we've always kept our options open and knew that if an offer happened to come along for a larger portion of our suburban office assets that we thought was very competitive pricing for us, we would make the move to really downsize that portfolio further and reinvest those proceeds again back into the development pipeline for bulk industrial and MOV. And it just happened to come along. And as I said, we think the pricing's very competitive right now, so we've made the internal decision after a fair amount of discussion that we thought we should move forward with that for the long-term benefits of the company.

[Jamie Feldman:]

And are you making any kind of call on those markets peaking out here? Or do you think they still have room to run?

[Denny Oklak:]

I would say and then Jim can chime in on this, I mean this is a very good portfolio and 91+% leased so I mean that's fairly high occupancy for suburban office portfolio. And, quite honestly, I think the more of the vacancy was in St. Louis than in those other markets and we think we have, we have done a fair amount of leasing in those properties over the last couple of years, we think the rental rates were pretty strong, so I don’t know if I call it peaking out but I think that portfolio was in excellent shape from a performance point of view and from the evaluation point of view.

[Jamie Feldman:]

Okay. And from your presentation it looks like the cap rate on the fourth-quarter run rate is about a 7.2? So how does that compare to where you can put capital to work these days?

[Denny Oklak:]

I think our development pipeline, Jim mentioned those numbers in the prepared remarks and our pipeline now is 8% to on cash yield and below 9% on a GAAP yield and that's really a combination of MOB and industrial so I think we have pretty descent accretion here.

[Jamie Feldman:]

Great. Thank you.

[Operator:]

We request join [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Could you talk about any potential G&A savings, given that you're actually everthing several markets here?

[Denny Oklak:]

What really even is, lot of those cost that will that our overall overhead will go down but a lot of those costs were really in charge the property anyway. So not G&A, people like our manager group or maintenance group are those costs will go way from the company point of view but that really won't affect G&A. Again, we don’t think there will be a significant effect on G&A because as we really try to try manage that number.

[Jim Connor:]

The point is that we are not closing those offices, the personnel there will be right sized to continue operate the portfolio but will still have offices in all the cities to run our remaining industrial portfolios and handle development. So it will importantly go down given the property portfolio size.

[Unidentified Analyst:]

Obviously this was a unique situation, with one buyer, but was there any other potential bidders for this portfolio that you were speaking with? And I'll leave it there for now.

[Denny Oklak:]

I guess what I would say is this was pretty much unsolicited expression of interest and unsolicited expression of interest turned into an offer when we gave them some information and the answer is yes we have had other unsolicited offers of interest in the portfolio and I will leave with that.

[Unidentified Analyst:]

Okay. And versus your initial expectations of the valuation for these assets, where did that come about? Is it on a one-off basis? If you sold all these assets individually I'm sure you would have gotten a little bit of better pricing. There is obviously pros and cons to that, but how close was it to your initial view of valuation?

[Denny Oklak:]

We have stated a lot of time looking at I mean all of our assets per valuation, but especially any asset that might be on the same block and I let Nick Anthony share with us today who is chief investment officer and it was really all of the acquisitions and dispositions we have done over the last number of years, so I let him tell you little bit about the process we went through looking at evaluation.

[Nick Anthony:]

We are very active in all of these markets and all of our markets and our capital transaction perspective, just to give you a flavour, since the last time transaction 2011 another billion dollars of office in all these markets. So we feel like we have a very good understanding of a property values in these market. So we spent a lot of time using our existing trades and then other people trade to determine where we can faire pricing areas. I think the other thing that is sort of unique today is that we are able to deliver a portfolio that is putting clear in debt. So the buyer can take advantage of existing debt markets to be able to push pricing in their end.

[Unidentified Analyst:]

Okay thank you.

[Operator:]

Question from Michael Bilerman please go ahead

[Michael Bilerman:]

Good afternoon. [indiscernible] is on with me as well. Denny, Mark, I wanted to thank you for the supplemental and pro forming all the schedules as if the assets were sold. It's very helpful to have from a modeling standpoint as well as from an information perspective. I also had a question in terms of just to make sure I got all the ducks in a row in terms of the numbers. You talk about the impact to 2015 FFO and AFFO, but you only provide the 2014 numbers. And I wonder if you can reconcile them a little bit. You talked about 4Q annualized NOI of 77.4%. I assume that's a GAAP number which had trended up a lot over the course of the year as you had occupancy build, so I wasn't sure what that was in 2015 on a GAAP basis. And then on a cash basis, it would appear as though there's a $0.06 delta and you disclosed $15 million of CapEx for 2014, which is about $0.04 which would indicate about $0.02 of straight-line. I'm not sure if CapEx was higher next year in terms of what was projected. Maybe just help reconcile some of the GAAP versus cash cap rate stuff.

[Mark Denien:]

See if I can try to answer that. First of all, the NOI that we disclosed in the fourth quarter is actually a cash number. Now it's actually very close to the GAAP numbers well, but the way we do our son will analyze schedules that are in that analyst package, it is a cash number. As you look then forward to 2015, obviously, the fourth quarter of 2014 NOI number was a little higher on an annualized basis in the full-year 2014 and that's because of the some leads that we have done in the portfolio during the year. So we would've anticipated on a GAAP number that $77 million on a quarter basis to be a little bit higher on an annualized basis for 2015. On top of that, because of that we had done a lot of those leases are earlier in the lease term so there is going to be some more straight-line rent on those, so there will be some straight-line rent in 2015, we would have got, GAAP NOI number a bit higher than the cash NOI number in 2015. Where as they were similar ’15 so because of that that's why AFFO was not as delusive as FFO because we would not have that as straight line rent would have been added back. And then the last point I would make that you brought up on CapEx, the numbers are what they are, we do our best job of budgeting and projecting out for 2015 but we know that it was $15 million of CapEx in ’14 that's down from about 20 million in that portfolio in 2013 and I would tell you that our expectations in ’15 is that it probably would have been closer ’13 number than ’14 number. So I think we would've expected CapEx by the end of the year and ’15 to be a bit higher than ’14 run rate. So there are lot of moving pieces there but hopefully that gives you a little bit to help on reconciling between the FFO and FFO dilution.

[Michael Bilerman:]

So, how much more would have, I mean stating about the cap rate, you are effectively saying the cash NOI for ’15 would've been a lot bit higher than what you would analyze the fourth quarter. I wasn't sure I mean was a big RAM, 71.8 for the full year versus 77.4 for the fourth quarter but I wasn't sure how much of that and had been building up over the course of fourth quarter, was it kind of like $80 million cash number four ’15 r something more moderate, just as we start thinking about what the effective rate really was.

[Denny Oklak:]

It was more moderate and I think Michael we were not projecting it to be too much higher than that fourth-quarter run rate. I mean if you think about it we have got the portfolio to 91.6% lease on a lease up basis by the end of the year. So it was closer to 7 million number.

[Michael Bilerman:]

Right. $7.2 cash and then basically $20 million of CapEx to drop you down to a $0.06 number?

[Denny Oklak:]

That's in the ballpark.

[Michael Bilerman:]

And in terms of the seller financing, talk us through the dynamics and then negotiation a little bit to your desire to at least have some, talking some capital at a return better than zero and their desire to get financing and how much confidence do you have in terms of what they're going about in terms of being able to pay that down over the next 24 months?

[Denny Oklak:]

I will start with the little bit on our desires and may be Nick can chime a little bit on what we think, may be their strategy is, but from our standpoint, is really two items affecting of Michael which was as you mentioned parking some cash and something better than zero had so rated you know even above our line of credit rate, so there is little bit of benefit, they're just working cash on fairly short-term basis and then the other piece to that is this will allow us to treat a portion of the this sale sand stole [ph] myself losing push some of that in the 2016 that has some positive benefits to us as well for being able to do that.

[Nick Anthony:]

And I think on the sort of financing it was just negotiation or balancing rate and term. I think the buyers will look at take us out of that, at some point 16 and possibly get at forward to then it from their lender that they are using on the rest of portfolio.

[Michael Bilerman:]

And then can you talk a little bit about the debt repayments, the $500 million to $700 million. The footnote says it includes the prepayment penalties and that you're going to target debt with a rate of 5.5% to 6.5%. Clearly if you were to bake in the prepayment penalties into the rate, the yield that you're getting on that debt on the investment is effectively lower. Can you give us at least some range of prepayment penalties that you are sort of thinking about within that $500 million to $700 million so we can think about the all-in effective return on that debt buyback?

[Denny Oklak:]

Sure, Michael. Its a lot of depend on how we finalize the plan. And we still see lot of moving pieces here, but it was likely will do some sort of debt tender offer or something like I mean obviously we won't know the pricing of that until it closes to the extent we don't get enough debt end from that we have some opportunities, you should make also some unsecured and we may take some of the very near term secured debt and go ahead and do prepayment penalties there. So it is a bit a moving target but I would tell rough numbers, it’s probably going into the $40 million to $60 million range, give or take based on our best estimates today.

[Michael Bilerman:]

So pretty much about 60 basis points? If you're buying back the debt at 6, it drops down to low to mid-5% in terms of effective return. And I assume because FASBEE doesn't tell you to treat that as a cost and roll it over the life of any new debt, that effectively from an FFO perspective you are going to get the full benefit of the 6% or rather be out of pocket from the capital prospective.

[Denny Oklak:]

I think that's right, Michael and we are going to really focus on our shorter dated maturities here I mean the way we see it, it's a good way to delever we don't want a prepayment penalties but the reality is the other option is to have sit on the balance sheet for a while and its interest we would have paid anyway over the short-term and, we are going to try to really focus on ’15 and ’15 maturities to the extent we can, but I think you're right.

[Michael Bilerman:]

Okay and just last question in terms of the remaining suburban office portfolio, just from an NOI perspective, obviously half of it's sitting where you guys are in ND and then you have the Cincy piece that you've tried to sell and then the stuff in DC which is suffering in the suburbs that everybody else particularly low leased. How should we think about those three pieces going forward which is the bulk of the remaining suburban office?

[Jim Connor:]

I will make couple of comments. The first is, I guess first of all, as we have said, we have some remaining dispositions. We have got either currently in the market or shortly to be in the market, some of the Cincinnati office assess because there are still older assets down there which has been really on our plan before this transaction. And in DC, you're right, it's been a difficult market, but we do only on 30% of those assets in a joint venture and some of those actually got sold late last year in the part of fourth quarter proceeds our proceeds were smaller to go and disclose our share and then I take the other pieces, we are sitting in one of our Indianapolis office assets right now we like put forward in the Indianapolis. It has performed very well and is that really where we are.

[Michael Bilerman:]

Thank you.

[Jim Connor:]

Thanks, Michael.

[Operator:]

We have a question from Brendan Maiorana. Please go ahead.

[Brendan Maiorana:]

So, Mark, sources and uses. I know you keep saying that the proceeds from the suburban office sale will be used to fund the development activity this year, but if I look at excluding the suburban office sale, it looks like you've got $400 million to $700 million of dispositions of properties, plus another $50 million to $80 million of land, so let's call that at the midpoint roughly $600 million. Your development starts are 400 to 500 and acquisitions are 75 to 150. Feels like your sources and uses ex the suburban office sale match up pretty well. Is that a fair way to think about it if I wanted to allocate the suburban office proceeds separately?

[Jim Connor:]

I think so Brendan. I mean if we didn’t do the suburban office sale, we would be able to fund our development and acquisitions with the rest of our disposition pipeline but then we wouldn’t be able to cover the current year debenture at least. So I think may be the only missing piece. We are talking about with the suburban office portfolio

[Brendan Maiorana:]

Understood. I was a little surprised maybe at the debt prepayment commentary that you gave to Michael, just given you've got $250 million that matures, I think that unsecured is in February. And then you've got 175 or so of mortgages that mature, so I would imagine those would be part of the 500 million to 700 million of debt repayments which doesn't leave that much left between 500 million and 700 million total. Maybe that's a couple of hundred million or so. So if you looked at your ’16 and ’17 expirations, that would seem like that would be pretty high prepayment penalties for the remainder?

[Jim Connor:]

Well, like I said we don’t know the number yet. But if you pull forward call at 500 million a debt, I think you are going to be in that $40 million $60 million range on the prepayment penalty. The thing are, our proceed slide on page six presentation we had on the web, leases with cash. So I don't know what money is fungible right that cap may be what was being used, that could be used for the development rather than the other disposition proceeds. So I know there are a lot of moving pieces but we really looking at this like we are going to move forward $500 million with the debt early and then some combination of this remaining cash here the other dispositions will pay our normal maturities early 2015, like that $250 million in February.

[Brendan Maiorana:]

Okay. That was the missing piece. So that was my misunderstanding. So this $500 million to $700 million is early prepayments; this excludes your existing 2015 maturities that would come before that?

[Jim Connor:]

It definitely excludes the 250 million in February.

[Brendan Maiorana:]

So your guidance of dilution from this sale of $0.07 to $0.09, that includes timing on prepayment -- you're selling the assets April 1, so you've got nine months, nine out of the 12 months of lost NOI from what you're selling. The prepayment of the debt, is that assumed to be in Q1 or Q2 as well or is that programmed for later in the year

[Jim Connor:]

No it’s like probably mid-Q2. By that time we would get that executed. We can’t mash it up perfect. So it would be called at May timeframe give or take.

[Brendan Maiorana:]

Okay. If I look at what you then have left, thinking going forward, you've got the $200 million of seller financing where you're only getting L plus 150, so when you get that paid back you can hopefully invest that more accretively? And then you've got another couple hundred million that would be not productive -- not put into work that you could invest as well?

[Jim Connor:]

That's right Brendan. I mean this cash or call it 90 million to 320 million, that's on our slide that's what we will start with after the after we take care of everything else on the slide and really, that cash will set on the book really through the remainder of the 2015 such that by the end ’15 we should really have fully deployed. But it will trend down, it will start higher and it will trend closer to zero by the end of the year.

[Brendan Maiorana:]

Okay. Question on operations. So same-store guidance is to 2% to 4%. Not sure if you have a breakout of that by property type. But it seems, given that your rent spreads appear to be pretty strong, they were strong last year and I think they -- I would assume that you guys expect to do that again, given that occupancy's pretty full. You've got bumps throughout the majority of your portfolio. And it looks like your occupancy is flat to maybe up a little bit average 2015 versus 2014. I would guess that maybe it would you a little bit higher but I wasn't sure if there was something that we're missing there.

[Jim Connor:]

I will chime in a bit on this, as we just mentioned we have only got 8% of our leases rolling this year from our revenue standpoint. So any bumps on those we are not going to get much benefit from this year and some of those I mean as you saw I would think that it’s likely we will get some pretty descent rent increases on those but it is not going have a huge impact this year. And then I think if you look at the overall blended portfolio of run rate increases in the 1.5% to 2.5% range on the stable portfolio. That's the kind of the run rate that we are look at right now and I think that's still pretty decent increase in same store as we go forward.

[Denny Oklak:]

And the other piece I would say Brendan it’s really difficult that the environment we are in where are recycling a lot of assets, is the target predict what assets are still going to be on the balance sheet at the end of the year to apply that growth. So the population of what gets old factors in and really makes it a bit more difficult to estimate too quite honestly.

[Brendan Maiorana:]

Okay, alright thanks for the time.

[Operator:]

Question from Dave Rodgers please go ahead.

[Dave Rodgers:]

Good afternoon. Jim, maybe I will start with you on development. You talked about a fairly robust pipeline and new development to start the year but the guidance for new starts this year is down from last year. So, I guess three questions around that. The first would be your ability and desire to ramp that range up as the year progresses, I think the second would be could you talk about your shovel ready returns, I thought I heard you quote something and then Denny quoted different numbers, so I might have grabbed two different things. So just to clarify the returns on what the new shovel will be. And then, I guess finally, can you give a little color on how build-to-suit opportunities are may be impacting that versus spec and maybe willingness or reluctance to pursue some spec?

[Jim Connor:]

Okay let me try and take him in the order you put him out there. In terms of ramping up, I would tell you that five to six hundred million dollar range is really kind of the sweet spot. First of all, you know in terms of the construction and the development teams that we had in place that's really what their staffed to do. We have gotten up a little better about maybe a hundred million about that from time to time but that's really kind of the sweet spot. We are also very focused on managing that percentage pre-released at the development pipeline and we've been focused on keeping that above 50%. So it's a combination of build-to-suit opportunities that are out there in the market as the market have gotten much more healthy You have seen more spec development that puts pressure on some of the yields there so I think we are being a little bit conservative in terms of our outlook on build-to-suit side. We have done little bit more spec development which is more in ’14 and ’13 and I think you'll continue to see us as long as we are able to cover our best on the existing spec, continue to pick and chose some market per some spec opportunity. So, I don't think we're in a run out and try and increase our development volume but $200 million to $300 million just because when Mark get little extra cash get in the bag, I would be surprised if we could find the number of project particularly on the build-to-suit that will allow us to do that but that doesn’t stop us from looking. In terms of the returns, I'm not sure which ones Danny and I misquoted, we might have more than a couple of numbers in front of us here but Mark just handed me another piece and I will just review we've got 497 million of stabilized cost in that development pipeline and the initial cash yield 7.4% and the stabilizing gap yield over the lease term is 8.1%. We have been comfortably running in that range for the last couple years, I think we will continue to see a little bit of downward pressure on the build-to-suit as things get competitive but I don't think we are going to see any serious erosion to that and we are still underwriting very healthy yields on the spec budget that we undertake. So I like that south Florida office, which I am sure got a few people off guard but when you talk about returns, they are stabilized returns in the high single to low double digits, those are very-very accretive development opportunities in what is a very tight, very strong office market.

[Denny Oklak:]

And Dave what may be we mislead on the numbers. Jim just quoted here are the returns on our whole development pipeline, it’s under construction now and I think in our prepared remarks, we quoted the return for starts through the quarter and those returns are a little higher so the start we had in the fourth quarter are even that better return than our overall pipeline and that may have been what we continues here. And I think the last piece, in terms of our quarter to quarter reporting, they do fluctuate a bit. It is really a function of what the mix is between the products and what the mix is between build-to-suit spec. And we had a great quarter article our healthcare does did a phenomenal job in the fourth quarter with those four projects, fifteen year lease and we getting very-very strong returns but again will see what the mix of projects is for the next quarter. We could have a couple build-to-suit and couple more spec buildings and the numbers can change a little bit quarter to quarter. But I think annualized, I think we're pretty good spot right now.

[Dave Rodgers:]

Jim, is the build-to-suit volume coming out in the pipeline just slowing down? I know it's slower percentage of the total but is it slowing down or are you just seeing greater competition?

[Denny Oklak:]

The opportunities are consistently out there. So I don't think it’s slowing down. There are few people that have the opportunity to look at spec building because there are more spec buildings out there. So I think the combination of that and the competitive nature but you know there is still great demand. If you look at the demand driver today the retailers, the e-commerce guys, the consumer products companies in the demand for brand-new big state-of-the-art buildings, 36/40 ft clear million-square-foot buildings, those predominant number of those yield end up as build to suit. Because of the start alternatives out there. So continue to see a very healthy pipeline and again I can’t I don’t want to underestimate , the opportunities that we see in the medical, the on campus and the off-campus MOB development pipeline is very-very healthy for 2015 and we look to be able make a big impact there.

[Dave Rodgers.:]

Great. Two last ones for Mark. Mark, any land sale gains in the guidance? I know there's land proceeds for the year but any gains?

[Mark Denien:]

Dave, we don't give guidance on games, because in our core FFO we don’t include games I would tell you we expect games. If you look at the profit, the land that we have sold over the last three years, it has been at about 15%. So I would tell you it's probably going to be somewhere in that range but it's a little harder to predict number one and like then like I say number two since it is not part of core FFO or whatever gains we have to exclude anyway, we just don’t really provide guidance on that.

[Dave Rodgers.:]

Last one. You talked about the asset sales you did in 2014, in order to manage your taxable situation, you didn't borrow from the 2015 dividend at all to cover that on a tax basis did you?

[Mark Denien:]

We did not and we had a little bit of excess in fact left over.

[Dave Rodgers.:]

Thank you.

[Operator:]

Question from Paul Adornato please go ahead.

[Paul Adornato:]

Thanks, good afternoon. Switching gears, could you tell us what you're seeing on the ground in the energy patch and what your expectations are if energy prices remain where they are or perhaps even go lower?

[Denny Oklak:]

Sure Paul. Let me give you a couple of comments. Like a lot of us we are conservative about the potential impact, particularly to market’s probably most problem would be Houston. I would tell you that Houston market is in great shape right now. We very strong demand, our existing portfolio is 100% leased with three projects under development, one is 50% pre-release and we have leases out not signed but leases out 87% of the space in those other two buildings so there is very good, strong, robust demand in Houston. If you look at the spec pipeline it’s actually download a little bit at year-end versus the third quarter, while their percentage per lease is actually up slightly so those are I think positive trends for that market in terms of trying to stay healthy. And then if you really drilled out from our portfolio perspective, the percentage of Tennessee in Houston portfolio, that are oil and gas related is less than life less than one percent and if you look at, even Houston and Dallas, I think it’s less than 0.5?

[Ron Hubbard:]

Yes.

[Denny Oklak:]

So it gives, we have very minimal exposure directly to the oil and gas industry and I think – it’s going to take a while before any that could possibly trickle down into the industrial markets. I think some of the office guys are little but more literary in terms of the immediate job impact on the office of the industry but we are not and we are seeing very healthy demand on the industrial.

[Paul Adornato:]

Okay great. Okay. Great. And looking at overall breakout between the three property types, what should we expect going forward? Is this the mix that you are comfortable with or should we expect some additional changes from here?

[Ron Hubbard:]

Paul I think you will see that at least initially the sub-urban office percent probably dropped a bit, below that percentage we lay out because I mentioned we had some older assets in Cincinnati that we are planning on marketing and right now we don't a big have a development pipeline on this urban office site. The only one we really have in process that is not part of the sale as the one that Jim mentioned down in south Florida. I think you will see go down a little bit initially and I think it is for the foreseeable which again for us isn’t necessarily that part of [indiscernible] I think it will stay right above can say right about that level.

[Paul Adornato:]

Okay. And, Mark, you mentioned leverage metrics, I think, or target metrics for the end of 2015. Same question. Are those leverage metrics that we should expect going forward or do you consider the Company underlevered at the end of 2015?

[Ron Hubbard:]

Underlevered! That's the line. No I don’t think we consider ourselves underlevered. Now, I think we expect fixed charge coverage to be right around 3.0 at the end of the year, I guess that EBITDA 6.5 or lower that grow assets in the low forties, more I look in the lever up from there, I can say that. So I think we can be majored in our approach and discipline and is continue to actually drive those matters even better as we had 2016 without any major kind of transaction.

[Paul Adornato:]

Okay, great, thank you.

[Operator:]

Question from Eric Frankel, please go ahead.

[Eric Frankel:]

Thank you. I was hoping you could comment on the financing that the buyer is likely to receive from the suburban office portfolio and the environment for that.

[Denny Oklak:]

They are currently working on finalizing on those terms but we don't know all the specifics yet but they have selected a lender and are working through all those. We expect that they will get it will likely be fairly highly levered and pretty lowest interest rate. Because we don't elect terms.

[Eric Frankel:]

Okay. That's to be expected. Jim, can you comment on the composition of the development pipeline that's likely for next year, the percent suburban medical office versus industrial? I'm not sure if you stated that before.

[Jim Connor:]

No, I didn’t. The development pipeline is all in various stages. I will tell you the number of opportunities and the development volume for the medical business is probably, I would 30% over the opportunities that we saw last year. So I think we see good up side but it is, it is a competitive market out there and you know that the healthcare industry somewhat different from the industrial business is a little bit more time intensive business for the these projects to work away through approval process. But we see a very healthy increase there. In terms of the industrial build-to-suits, it’s fairly consistently strong what we saw last year and I think we have seen a huge increase. You could see some big square fluctuations in our pipeline given the size of these deals that we see now with the Wal-Marts and the Amazon to the world that are out there but that that is pretty consistent and then we are just evaluating the local markets in terms of where we want pick and chose spec development and a lot of that is really driven by how quickly we can lease up the existing buildings we have, the existing spec building we have out there in the marketplace and we have got a great activity on the pipeline for leasing the spec in Houston, a project New Jersey are also have a lot of activity and we would hope to be able to reports some good results. And then simply function of the major project that will bring online the first quarter at how much lease we get there, we get down there and they will make some decisions about where we want to build the spec.

[Eric Frankel:]

Okay. Perhaps as you might have done in prior quarters, maybe a brief outline on the supply outlook for the US? Industrial? Have you prepared that?

[Jim Connor:]

We get our preliminary supply numbers in. I would tell you that, it would appear that there was a slight increase in the fourth quarter over the third quarter of about ten million square feet of product– a smaller increase there from the third quarter to the second quarter, which was about 20 million square feet building increases are primarily at Atlanta. Atlanta was probably the last of the tier one markets to fully recover. They have got about 11 million square feet of speculative project now which is up from about four, which on the surface migrates some red flags, but Atlanta had about 18 million square feet of net absorption. So they are, it’s very strong and very robust in Atlanta as well. A lot of other big markets are really pretty much flat, Chicago had a very modest increase of about 500,000 square ft stand, New Jersey, about the same, Pennsylvania is actually down slightly Houston is actually down slightly, Inland Empire is pretty flat. Pre-leasing percentage on the portfolio that we are looking at is actually up from about 14.5% to 16.5%, so I think on the supply side, I have seen just couple of markets. We think the world is still in pretty good balance. The other thing I would want to remind everybody and we share these numbers with you from time to time and it is different, the industry meetings 120 million square ft of spec compares to 165 million at the peak back in 2007-2008. So I think were still well under those levels with good percentage pr-released and great positive absorption of the market. So most everybody is pretty bullish on 2015 and the industrial market.

[Eric Frankel:]

Great. I'll jump back in the queue. Thank you.

[Operator:]

And we have a question from Vance Edelsen. Please go ahead.

[Vance Edelsen:]

Speaking of the industrial market, in your conversations with tenants, what's the latest tone around lease durations? Is there willingness or even an urgency on their part to lock in for longer as vacancies continue to dwindle? And if you think rents will continue to rise, which sounds likely, are you at all better served by keeping a lid on lease duration for now so that you can take advantage of stronger rents down the road? How is that dynamic playing out?

[Jim Connor:]

I don’t think anybody thinks that there is that much consistent and upside and rent growth in the next few years that we are going to strategically shorten our lease terms. I will tell you most tenants are feel very good about their business, the overall economy and are pretty comfortable making longer lease term commitments, lot of builders since that we that we do are now are in generally the minimum ten years quoting a lot of 12 and 15 year deal. So people are pretty comfortable making commitments ,in terms of lease term activity. The only uncertainty we get is from tenants that are having a hard time deciding how much growth they need and how much additional space they want lock-in so we have had a number of situation situations where we work with some tenants like that on the short term, they are looking at consolidations or looking at build to suit with the more space and it does not quite sure how much more space, whether they're contemplating acquisitions or whatever it depends on case-by-case but nobody is making long lease commence today.

[Denny Oklak:]

The other thing I would report, it is almost all of our industrial market today, we are getting annual rent bump, so that takes out some of the concerns about what are locking in rate today that might go higher next year.

[Jim Connor:]

Let me clarify that. in all of our market, we are getting annual rent bumps and with the occupancies in the market, what things we have really pushing on for the last year with the increase in those annual escalation and industry-standard in ’13 and going into ’14 was about 2% of annual escalation. There are a lot of markets given the strength of the polio and where occupancy we have been to push that 2.5%. So what really kind of protecting our long term interest in those buildings.

[Operator:]

Now, I would like to turn the conference back to Ron Hubbard for closing comments.

[Ron Hubbard:]

I would like to thank everyone for joining the call today. We look forward to following up with more view off line and see many of you during the year end conferences as well as open to see regional markets. Thank you very much.

[Operator:]

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.