Duke Realty Corp. (DRE)

Q2 2010 Earnings Call

July 29, 2010 3:00 PM ET


Randy Henry – Assistant Vice President, Investor Relations

Denny Oklak – Chairman and CEO

Christie Kelly – Executive Vice President and CFO

Mark Denien – Chief Accounting Officer


Ki Bin Kim – Macquarie

Josh Attie – Citi

Chris Caton – Morgan Stanley

Brendan Maiorana – Wells Fargo

Mike Knott – Green Street Advisors

Vincent Chao – Deutsche Bank

Sloan Bohlen – Goldman Sachs



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 question-and-answer period instructions will be given at that time. (Operator Instructions)

And as a reminder today’s conference call is being recorded. I would now like to turn the conference over to your host, Assistant Vice President of Investor Relations, Randy Henry. Please go ahead.

Randy Henry

Thank you. Good afternoon, everyone. And welcome to our second quarter earnings call. Joining me today will be Denny Oklak, Chairman and Chief Executive Officer; Christie Kelly, Executive Vice President and Chief Financial Officer; and Mark Denien, Chief Accounting Officer.

Before we make our prepared remarks, let me remind you that the statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Some of these risk factors include our continued qualification as a REIT, general business and economic conditions, competition, interest rates, accessibility of the debt and equity capital markets, increases in real estate construction costs and other risk inherent in the real estate business. For more information about those risk factors, we would refer you to our 10-K that we have on file with the SEC dated March 1, 2010.

Now, for our prepared remarks, I'll turn it over to Denny Oklak.

Denn y Oklak

Thanks Randy, and good afternoon, everyone. It was another successful quarter for Duke Realty. We had solid operating performance and made significant strides in our ongoing strategy to reposition our portfolio. Opportunistically allocate capital to growth areas and further strengthen our balance sheet. All of which Christie and I will cover.

First, I will give some comments of what we’re seeing today in the markets and our expectations for the remainder of 2010. Then Christie will provide an update on our second quarter 2010 financial performance and capital market activities.

Our second quarter results reflect what we’re seeing from the property fundamentals in our markets. The industrial side of the business continues to improve. We again have success filling some of our larger bulk spaces.

The positive movement in industrial metrics including shipping, freight and industrial production data are translating into increased demand for industrial space. Our sense today is that we are passed the bottom of this cycle on the industrial side, but we believe it will be a slow climb from here. Customers are still being cautious, but are beginning to commit to new space as reflected by what we expect to be the first positive quarter of net absorption for industrial space nationally since 2007.

The office side of the business is lagging behind the industrial business, which is very typical of this point in the cycle. High unemployment continues to be the primary factor causing negative absorption in the office business.

In looking at economic forecast, the general consensus seems to be that unemployment rates are going to continue to be stubbornly high for an extended period. If these predictions are correct, we would not expect to see a bottom of the office business until mid 2011. This timeframe is also in line with our historical experience as the office business generally picks up four to six quarters after industrial.

One other comment on business in general. We continue to see operating pressure on many of our customers’ businesses. Continuing tenant concerns during the second quarter caused our bad debt expense to increase to back over 50 basis points of total rental revenue after taking down to our normal range of 25 to 30 basis points in the first quarter. Industries being most affected are construction and other residential housing suppliers.

The development opportunities continue to be relatively slow, with the exception of the medical office piece of our business. We are working with a number of hospitals on new projects and expect to announce the specific medical office starts in the second half of the year.

Another piece of good news, is that we are seeing some activity in the industrial build-to-suit business. These are the first meaningful discussions we’ve had on industrial build-to-suit in nearly two years. It’s still too early to say whether these projects will get started but nonetheless it’s positive news.

For the remainder of the year, we’re focused on three specific areas of strategic execution. First, our operating strategy is very straightforward, lease up the vacant space in our existing buildings to generate additional cash flow and selectively pursue development opportunities in medical, office and build-to-suits.

Second, our asset strategy will focus on the continued disposition of non-strategic properties, as well as pursuing strategic acquisitions. We are seeing good activity at good pricing for the assets that we are marketing for sale.

On the acquisition side, we are actively pursuing opportunities that are aligned with our longer-term objectives, including increasing industrial and medical office investment and suburban office in selected high-growth markets.

Third, our capital strategy remains focused on further deleveraging of the company. We have executed transactions in 2010 to buy back bonds and preferred stock and have successfully accessed the debt in equity markets.

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