Duke Realty's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Duke Realty Corporation ( DRE)

Q2 2011 Earnings Call

July 28, 2011 3:00 PM ET

Executives

Christie Kelly – EVP and CFO

Dennis Oklak – Chairman and CEO

Analysts

James Feldman – Bank of America

Ki Bin Kim – Macquarie

Josh Attie – Citi

Steven Frankel – Green Street Advisors

Sloan Bohlen – Goldman Sachs

Ross Nussbaum – UBS

Vincent Chao – Deutsche Bank

Michael Carroll – RBC

Brendan Maiorana – Wells Fargo

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Duke Realty Quarterly Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host, Executive Vice President and Chief Financial Officer, Christie Kelly. Please go ahead, sir.

Christie Kelly

Thank you. Good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Denny Oklak, Chairman and Chief Executive 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. For more information about those risk factors, we would refer you to our December 31, 2010 10-K that we have on file with the SEC.

And now for our prepared statement, I’ll turn it over to Denny Oklak.

Dennis Oklak

Thank you, Christy. Good afternoon everyone. Today I will highlight some of our key accomplishments during the quarter in both our assets and operational strategies. Christie will then address our second quarter financial performance and progress on our capital strategy.

We finished this quarter with a solid month in June making it an excellent operational quarter overall. The performance is primarily driven by a strong leasing activity across several markets particularly on the bulk industrial side.

The completion of Premier portfolio acquisition in South Florida in our office joint venture transaction with CBRE Realty Trust nearly ended the first quarter provide significant momentum for us on our asset repositioning strategy. While the second quarter was a little slower on the acquisition and disposition front, I’m pleased with our continued progress and repositioning in the second quarter.

From a macroeconomic perspective most of the news continues to be somewhat negative. Job growth is slowing, GDP growth is below earlier projections and uncertainty continues in many areas. These factors are affecting our business but there is also some positive news.

Net absorption was again positive for the industrial sector nationally during the second quarter. Vacancies continued to decline in most markets across the country. New to government starts remain at historic lows but there is some talk of limited new to government occurring later this year. Overall, this sector continues to improve and the trend for the rest of the year appears positive.

The office business continue to be challenging but there are also some positive signs. Overall, our rents are holding are beginning to improve slightly as indicated by our positive rent spread this quarter. We are seeing more customers being active but this is still going to be a slow haul for the suburban office recovery in most markets.

From a Duke Realty perspective, I’m very pleased to report that we were actually able to improve many of our key operating metrics during the quarter. Total portfolio occupancy increased to 89.3%, which is our highest level since early 2005. Our in-service occupancy of 89.2% is the highest since 2007.

As I noted on our last couple of calls, we are aware of the few large terminations in our industrial portfolio in the first half of the year. Many of these expirations occurred during the second quarter but new activity was solid as we signed over 4.6 million square feet of new leases this quarter. In total, we signed over 8.1 million square feet of leases including renewals, which is our best quarter of total leasing activity ever if you exclude leasing and new development projects.

We renewed 61% of our leases during the quarter. This tenant retention rate was low by our normal standards but as I mentioned many of these spaces were back filled with new tenants and overall we had an occupancy increase. We experienced a 1.6% roll down in net effective rents overall most of – with most of the roll down coming in the industrial renewals.

Keep in mind that many of these leases that are rolling now were signed at the peak of the market in 2006 and 2007. We expect rent spreads continue to be challenging for the rest of the year but we believe you will see traction in rates on the industrial side as vacancy rates continue to decline.

We also achieved positive same-property NOI for the three and 12 months ended June 30th of 0.5% and 1.5% respectively. These positive results were driven by increases in occupancy and the burn-off of some free rent.

Now let me touch on some of the key activity within each product type for the quarter. As I noted industrial seems to be picking up across most markets. This seems to be especially true of larger modern big box spaces, which bolds well for us. This was evident in the fact that we completed over four million square feet of new industrial leases.

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