Duke Realty's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Duke Realty Corporation (DRE)

Q1 2012 Earnings Conference Call

April 26, 2012 15:00 ET

Executives

Ron Hubbard – Investor Relations

Denny Oklak – Chairman and Chief Executive Officer

Christie Kelly – Executive Vice President and Chief Financial Officer

Mark Denien – Chief Accounting Officer

Analysts

Josh Attie – Citi

James Feldman – Bank of America

Paul Adornato – BMO Capital Markets

Ki Bin Kim – Macquarie

Dave Rodgers – RBC Capital Markets

Blaine Heck – Wells Fargo

John Stewart – Green Street Advisors

Vincent Chao – Deutsche Bank

Presentation

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 and then later we’ll have a quarter-and-answer session. (Operator Instructions) And as a reminder, the conference is being recorded.

I'd now like to turn the conference over to our host Mr. Ron Hubbard. Please go ahead sir.

Ron Hubbard – Investor Relations

Thank you. Good afternoon, everyone, and welcome to our first quarter earnings call. Joining me today are 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 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, 2011 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 – Chairman and Chief Executive Officer

Thank you, Ron. Good afternoon, everyone. Today, I will highlight some of our key accomplishments during the quarter in both our operational and asset strategies. Christie will then address our first quarter financial performance and progress on our capital strategy. Then I’ll finish up with our prepared remarks with some comments about our outlook for the remainder of 2012.

By all accounts, the first quarter was a great success for Duke Reality and I am very proud of our team for their accomplishments. We signed over 8.7 million square feet of leases in the first quarter, the highest quarterly total in 5 years. We have positive net absorption during the quarter of nearly 3.7 million square feet, which rivals our annual net absorption for both 2010 and 2011.

We increased our overall occupancy by 144 basis points to 92.11%, which believe it or not, is our highest level of overall occupancy since the first quarter of 1997. We started development of a $121 million of 100% long-term lease industrial and medical office projects, which will have an average initial stabilize yield of 7.05%. We completed $157 million and $65 million of strategic acquisitions and dispositions respectively. We made continued progress on our asset repositioning strategy. And finally, we issued a $147 million of new common equity and redeemed a $168 million of our preferred shares reducing our overall leverage in accordance with our capital strategy.

From the macro perspective, we’ve been pleasantly surprised with the momentum in economic and consumer and business sentiment, which appears to be improving the confidence in our customers to execute new, renewal, or expansion lease decisions as well as execute construction and development transactions. Absorption and occupancies continued to trend up in bulk industrial and medical office, but suburban office continues to tread water with the recovery still a number of quarters in the distance. We are hopeful that the steady economic up tick will continue. They will give us still elevated macroeconomic and geopolitical risk in the Europe and the Middle East. And given the looming political showdown here in the U.S. this fall, we know there are still continued risks to our business.

Fortunately, the execution of our asset and capital strategies the last few years have placed Duke Realty in a strong position for future growth as well as being better able to weather volatility from occasional macroeconomic shocks.

We also renewed 84% of our leases during the quarter and attained an overall rental rate growth on these renewals of 1.8%. We achieved positive same property NOI for the three and 12 months ended March 31, a 4.7% and 3.6% respectively. Other than retail all product type….

Operator

Mr. Hubbard, this is the operator, we’re not hearing you speak at this time sir. There you go. Okay, we can hear you now.

Denny Oklak – Chairman and Chief Executive Officer

The national industrial market continues to slow improvement with demand drivers improving on all fronts. Early indication show first quarter vacancy levels decline to another 10 basis points or so down 20% to 30%, 30 basis points in some of our key markets such as Atlanta and Indianapolis. Rental rate growth is relatively flat nationwide, but some pricing power has returned in select markets. Another recent data point is that the Georgia Port Authority hit an all time cargo tonnage record in March growing at significant 8% over the same period a year ago, which we expect to bode well for our dominant position in Savannah.

With respect to leasing, in our in-service portfolio we completed over 2.8 million square feet of new industrial leases and approximately 3 million square feet of renewal leases, including new leases, on development build-to- suits, our industrial leases totaled over 7.4 million square feet, a record industrial leasing quarter for the company. This leasing activity increased our overall industrial occupancy to 93.6% at March 31. Some of our larger lease deals included the signing of a new deal to back sort of 1.1 million square foot distribution center in Atlanta, that was vacated at year-end.

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