Duke Realty Corp (DRE) 2002 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Duke Realty quarterly conference earnings call. Later we'll conduct a question and answer session. Instructions will be given at that time. If you should require any assistance during today's call, please press zero followed by the star and a -- as a reminder, this conference is being recorded. I would like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr. Tom Peck. Please go ahead, sir.

Thank you, Tom. Welcome to our fourth quarter investor conference call.

I'm joined today by Tom Hefner, our Chairman and Chief Executive Officer; Denny Oklak, who was named President and Chief Operating Officer; Gary Burk, Executive Vice President; and Gene Zink, Chief Financial Officer; both Gary and Gene were named Vice-Chairmen yesterday. Bob Chapman, Executive Vice President of the Southern Region; Howard Feinsand, Executive Vice President and General Counsel; Bill Linville, EVP over the Midwest Region; and Matt Cohot, Senior Vice President and Chief Accounting Officer; Donna Hovey, Vice President of Marketing; and Shawna Budwell, Manager of Investor Relations.

I need to remind you now that as we make forward-looking statements on today's call that those statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectation. Some of those factors include our continued qualification as a REIT, general business and economic conditions and increases in real estate construction costs, interest rates, accessibility to the debt and equity capital market and other risks inherent in the real estate business.

With that, I'm pleased to turn the call over to Denny Oklak.

Thank you, Tom. Good afternoon, everybody.

As we predicted, at our December investor conference, FFO for the fourth quarter was flat at 59 cents a share. This performance is consistent with our view that the deterioration in the business seems to have bottomed out, but recovery will be slow. Further evidence is the one basis point improvement in occupancy in the total portfolio from the end of the third quarter to the end of the fourth quarter. You know it is a tough business when you lease nearly six and a half million square feet in a quarter to pick up one basis point.

The in-service portfolio declined by 40 basis points due to lease terminations and placing in service 800,000 square feet of new development property. We made solid progress on the development portfolio, increasing occupancy there by 12% to 79.52%. This is the highest occupancy level in the -- under development category since 1995.

This should have a positive impact going forward since buildings rolling in to the in-service portfolio are substantially leased. Again, buttressing our hope we've reached the bottom of the cycle, occupancy in the in-service portfolio declined by 86 basis points since the first quarter but that included approximately 2.3 million square feet of leased buyouts. Had had it not been for the leased buyouts, occupancy over that period would have improved somewhat rather than deteriorate by the 86 basis points. Needless to say, the amount of leased buyouts in 2003 is anticipated to be significantly less than it was in 2002.

Thanks to our performance and the quarter was down by almost 2%, due mostly to an occupancy decline of 80 basis points in the same store population. Renewal rates remain satisfactory at 71% for the quarter and 72% for the year. Bad debt expense returned to a more normalized level in 2002 at just 26 base points compared to total revenues down from 61 basis points in 2001.

As discussed in December, development and acquisition velocity has picked up somewhat. The value creation pipeline has built back up from its bottom at midyear to 336 million. Development starts in 2002 were up 26% over 2001 to 256 million. We also closed $67 million of acquisitions in the fourth quarter bringing the 2002 total to $114 million at a stabilized return of 10.44%.

We continue to enhance our balance sheet with market leading transactions. In the fourth quarter, we placed ten-year debt as what we believe is the lowest interest rate ever sold by a REIT. We placed $175 million of seven-year debt and again, what we believe is the lowest spread ever for a REIT with a seven year paper. The coupon on the debt is 5.25%. As part of the annual assessment of the value of our properties under FASB 144, the company recorded an impairment charge on six buildings totaling $9.4 dollars. Three of the buildings are in Minneapolis and were purchased for redevelopment when market conditions permit. As such, they're marketed only on a short-term basis which impacts rental rates and thus value. The other three are in Atlanta and in hindsight were allocated too high a basis in the week's merger.

Any impairment of value is unfortunate, this is only -- impairment resulting for our annual reviews over the last several years and the charge is less than 2/10 of one percent of the value of our assets.

You will recall in December we gave your change range of FF0 for 2003 of $2.40 to $2.55. We also suggested that FFO in the first quarter would be off 5% to 8% from the fourth quarter level and pick up thereafter. We continue to be comfortable with that guidance.

At this point, I would like to turn the call over to Tom Hefner for some comments.

I have been working with the board of directors for some time concerning transitioning leadership of the company to the next generation. This has been a thoughtful process, focusing on ensuring the company is even stronger after this transition. We are very fortunate to have a very strong management team and I look forward to working with them over the next two years as successors are identified, trained, and assume their new roles. With that, I'll turn the call back to Tom Peck for questions.

Operator, we're ready to take questions from our audience.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the one on your touch tone phone. You'll hear a tone indicating you've been placed in queue. If you press the one prior to this announcement, please do so again at this time and you may remove yourself from queue at any time by pressing the pound key. If you have a question or comment, please press the one.

Our first question comes from the line of Greg Whyte with Morgan Stanley.

Good afternoon, guys. Just a couple of questions here. Tom, I don't know whether to subscribe this to you or Denny but the press release states that you're seeing sort of the fundamentals may have bottomed out. And that comes in the face of continued and sequential decline in occupancy and same story. Can you give a little bit more color even if it's anecdotal. You talked a little bit about the reversion in the bad debt percentages and stuff which I think helps in that light but can you throw any other data at us that would help to substantiate that sort of comment?

Sure. I want to assure everybody that Denny's responsible for answering all of those questions now so I'll be happy to turn that over to Denny and let him answer it for you.

Well, thank you, Tom. Greg, I think just a couple of points I would make on that. We did have a slight decrease in occupancy on the in-service portfolio for the fourth quarter but really, when you look at it, it has been pretty flat since the end of the first quarter. We only went from 87.91 down to 87.05. When you look at all of 2002, we actually picked up slightly on the overall portfolio from 86.55 to 86.84. So, I think that's what's making us feel better.

Again, we had several lease buyouts, some in the fourth quarter that caused that decrease. We are seeing the activity pick up. I think everywhere. It is not booming necessarily by any means but it has picked up. We're also seeing a slowdown in the lease buyout activity I think the bulk of that is gone in 2002 not that there won't be some coming into 2003 but I don't think it will be at the same velocity so I think those are the things that make us feel like we're sort of bottoming out.

If it is relevant at all, what were average occupancies during the quarter end occupancies on the same side?

I don't know that we have that number. But I don't think you have a lot of difference there, Greg. I mean again, on the same store side, for the in-service portfolio, excuse me. Tom was just pointing out -- Tom Peck is pointing out on page 21 of our package, we show the average occupancy.

The same store we do report is on an average basis which reflects the economics more so than an end of period basis.

Then I guess what I'm looking for is a trend. Did you actually see like a turn in the quarter?

Well, again, Greg, I would say that it didn't change significantly. Only by about 40 basis points during the quarter. So, we didn't -- and that included some buyouts so I think if we would not have taken the buyouts in the fourth quarter, we would have seen an uptick in the in-service occupancy.

Ok. We are continuing somewhat in that theme but obviously I want to think more about payoffs and stuff. Can you give any indication of what expectations are for like second generation Cap X and stuff in '03. It kind of rolls in the fourth quarter to sort of peakish levels. Are you seeing any change there and what might we expect for '03?

Well, I think we have seen some change there because leasing activity has picked up. And so our capital expenditures have gone up. They were a little bit high in the fourth quarter and in the second half. Because of a couple large office deals that we did. One in Chicago and one in Cincinnati. That we had a little bit more than usual capital expenditures on and they were both very large leases. And so they were a little bit higher in that -- in the quarter than normal. But I think we'll continue to see relatively higher levels of Cap Ex as we hopefully continue to increase the occupies of the portfolio.

Ok, then on G&A, the line item was sort of drifted lower at a time when we might have expected it to be higher. Can you talk about what was it that contributed or didn't contribute to that going up and also, can you comment on D & O insurance which some of your compatriots are talking about having driven cost up by.

Sure, Matt, you want to answer that one?

Sure. Page 26 of the supplemental will help with this but there are a couple of answers to it. One is that our leasing activity for the fourth quarter was substantially up from prior quarters and that absorbed -- that was increased construction activity absorbed a greater amount of overhead than we've had in the previous three quarters. Also, in the fourth quarter, as we closed out the books, we made adjustments of about a $1.5 million to the long-term compensation plans to get in accordance with the GAAP and that is well reduced -- has well reduced our overhead.

Ok. Our D & O insurance, it did increase fairly significantly. From the last year -- by about 100%. But you're talking about a quarter of a million dollars.

Well, and Greg, I would point out that all of our insurances on a sort of a fiscal year, July 1st to June 30th including the D & O so all of that renegotiation took place in the middle of this year so it's in the numbers for the second half of 2002.

Greg, I would also remind you that we -- I think we've -- given guidance, that we expect that the fourth quarter G&A is low and a better run rate is what we've talked about in the past of around $7 million.

Ok.

One other thing to point out. We did increase our D & O coverage. With Tom leaving, we felt like we might have to do that. [ LAUGHTER ]

Thanks very much.

How easy they forget, Greg.

Thanks, guys very much.

Thanks, Greg.

Our next question comes from the line of Michael Billerman with Goldman Sachs. Please go ahead. Your line is open.

I'm here with David Kostin as well. I'm wondering if you guys can walk through the decision to acquire real estate versus stock buybacks during the quarter and what is your strategy going forward in relation to stock buybacks.

Well, this is Denny. I'll take first crack at that. I'm sure others will chime in with some opinions.

Obviously, our goal long-term is to own real estate and not really own our own stock. We're in the real estate business. So, I think that's the way we look at it and we found what we thought were a couple of very good deals during the quarter. And we're very happy in light of the current economic conditions and the current market for acquisitions with the yield that we're getting on those properties. We're very happy with the long -- the price we paid, being a long-term value. On those properties. So that's why we proceeded with the acquisitions, obviously.

On the stock buyback side, you are all aware that we have a plan in place to allow us to repurchase our stock. We have not exercised that. We continue to monitor on a regular basis and on a quarterly basis, and look at where the stock price is and there will or may be a day that the stock price gets to a point where we want to go ahead and use part -- use part of that plan. We just haven't gotten to that point. We've always had the philosophy of being relatively lowly leveraged I think compared to our peers. We believe it is a good time to be in that philosophy and will allow us to accelerate our earnings as things in the economy do pick up and our opportunities for new development and other acquisitions pick up.

Michael, this is Gene. We have, as we've talked before on other calls, been very surprised that the pricing of real estate assets hasn't reflected the deterioration in real estate fundamentals. We've got targets for what we are prepared to buy and at what price both in buildings and in stock and we're going to keep our discipline and use our liquidity when we can satisfy those goals.

Gene, David Kostin. Question really following up on a point that Greg made. You changed your compensation policy starting in the fourth quarter that you'll no longer -- the deferred -- paid in cash as opposed to stock so I'm surprised to see the G&A expenses dropped by 40% in the quarter even at a time when you changed the stock base compensation philosophy. I wonder if you could speak to that topic.

This is Matt. The change in the plans going from a stock base payout to a cash base payout really doesn't have any effect on the accruals or what comes through in the P&L. What it does affect is the calculations of your diluted shares and so that reduced the amount of diluted shares we have outstanding by about a million shares on an ongoing annual basis. During the year, we did implement FASB 123 and -- we recorded $400,000 of expense for our option stock issuances and other than that, there's not really any effects of the changes in our plans or our policies.

David, this is Tom Hefner. One other thing, you need to remember that there is still -- there still is an -- and will always be, I think, a stock ownership guideline requirement for directors, for senior officers and for management committee members. And this is more of a tweaking of how the dividend increasing units are paid out and how the shareholder value plan is paid out. But there still is a very strong philosophical position here with how much stock people own in the company.

Thank you.

Does that answer your question?

Yes.

Our next question comes from the line of Lou Taylor with Deutsche Banc.

Thanks. Back to the acquisitions for a minute. Can you just maybe describe a little bit in terms of the nature of the acquisitions office versus industrial? For the quarter?

Yeah, the primary acquisition that made up the bulk of it was a property in St. Louis and I'll let Bill Linville talk a little bit about that acquisition.

It is in the sub market in St. Louis called Clayton for those of you that are familiar with St. Louis. Clayton is really the second downtown to St. Louis and is in the suburban market. The most stable and has commanded the highest rents. Has always had very high barriers of entry. And there was a property that Equity Office owned called Interco tower which is a class A project about 14 years old. And it was the only asset that Equity had and they contacted us and a couple of others very quietly that they knew would be interested and we were able to purchase it.

When we purchased it, it had 91% occupancy. That was 45 or 60 days ago. We're now up to 94% and we've got a couple of transactions in the works that would take us to about 98% on occupancy. And our basis in that property is well below reproduction cost. If you could even build anything in the market and there's only one site upon which you could do that.

All right. Can you guys just talk generally about the acquisition climate? I mean other than this transaction. Have you seen an increased number of deals that would fit your investment criteria?

Bob Chapman, you want to take a crack at that one?

Lou, on the industrial side, it is still very difficult to buy. There is a real disconnect in my mind between fundamentals and the market and what the properties are worth so there's very few industrial properties out there. That are really in our target range. On the office side, we are seeing an increase in opportunities. Really with value added capabilities. And as I mentioned at the investor conference, I can see us doing several of those this year.

All right, great. Just going back to the fourth quarter impairment charge, can you just expand a little bit on that in terms of what maybe the economic loss ended up being on those six assets?

I guess there really isn't an economic loss today because we haven't disposed of those assets but as Matt pointed out, under the accounting rules, there are certain rules that you have to live by and a methodology of analysis to determine whether there is an impairment charge that should be taken and we have followed that every year. It has been in place for a number of years. And we followed that every year. And this is the first year that we've ever come across anything that we had to take an impairment charge on.

Again, the primary issue as we said in the prepared remarks that there was a couple properties up in Minneapolis that were originally purchased with the redevelopment idea and but we are not at the point obviously -- they're on the office side where we can begin a redevelopment because of the state of that market but we're going to -- but -- so when you look at the buildings individually, what you could actually lease for those -- those for today and how it works, the accounting rules would make you take a little bit of an impairment charge.

The other one -- significant one -- two industrial buildings in Atlanta that were part of the Week's [ph] merger and when you look at how we allocated the original purchase price of the week's merger using the purchase accounting, you know, the basis on those assets was probably just too high because at the time of the merger, they had tenants in there that were paying very high rent because the buildings were highly over improved and when those tenant vacated, and you go to look at what you can really release those for, it is less than what the previous tenant was in and when you go through the calculation, it results in that kind of an impairment charge. But I think the thing to point out is you know, it is $9.5 million on $5.5 billion worth of assets so we're -- you know, we're pretty happy with the quality of all of our assets.

Ok, thank you.

Our next question comes from the line of Don Fandetti with Wachovia securities. Please go ahead.

I noticed that the new leases signed in the quarter for bulk warehouse, the lease term increased notably. Is this a trend or a shift? Or is it just one or two specific leases?

In this is Bill, Don. I think that -- I think that that probably does not represent a major shift in trend although there is in the renewal sector, stabilization that's happened just like it's happening in the general market. If you look in the supplemental package, the rent growth and the cap ex cost in our renewals, the rent growth increased this year over last year. Not as much as our typical run rate but it did and the cap ex actually went down and what we have found and it is indictive in the percentage of renewals we've done that tenants that are in good locations are holding on to their space. Because a lot of the demand has not decreased. It is just their approval rights to spend capital decreased. They typically would like to keep their term shorter if they can. But I think we did have a couple of tenants that renewed for longer terms. Would be the biggest impact to it.

Ok and lastly, Gene, back to the cap ex question, looks like your building improvement costs picked up in the fourth quarter. Why would that be and also is that a good run rate going forward?

This is Matt. There were a few projects that we did some roof repairs on in the fourth quarter that made that number a little bit higher but as we are cleaning up the projects and trying to release the space, we do expect that the numbers we experienced in the fourth quarter would be pretty good as far as a run rate in 2003.

Ok. Thanks.

Our next question comes from the line of Gary Boston with Salomon Smith Barney.

I'm here with John Litt, as well. I guess Gene or Matt, in terms of the -- about $260 million in debt you have maturing this year, can you just give us a little guidance on the timing of that and what you see happening with those maturities. I don't know if it's one big mortgage or just a bunch of little ones.

No, Gary, it is all in the second half of the year. And it is bits and pieces. We probably will not do anymore debt until after -- until into the third quarter. And then we have had some of that risk at this point. And if we get the right opportunities, we'll hedge some more.

Ok. You can probably help me out with this as well. I know you haven't had a lot of acquisitions over the past year or so but any idea what if any impact there would be from the new FASB 141 ruling in recognizing the above or below market rent?

It is a heck of a pain. But other than that, hopefully we're buying -- you know, three or four years ago, you might find leases that were well below market. I don't think that's something you find very often today. And so of course we go through the drill when we buy. And we'll report it if it is appropriate but I don't anticipate a lot of that.

Ok. And just finally looking at the '03 lease expirations, I was just wondering if someone could sort of give us an update on how things are going year to date. How much of that has been either put to bed or is in active negotiations.

Gary, this is Denny. I would say that I think the first comment I would make is obviously it is just the beginning of the year but I would say that you, know, for us, having 10% going into a year is really a pretty good number. You could see on the expiration schedule that several of the years going out are higher than that. So, we're based on where we are with occupancy levels and the markets right now. We're happy we have only 10%.

We're always -- we're always conducting conversations with our tenants about early renewals and what we can do for them. And so, I think it is really -- there's obviously some of that is in the first quarter. We're in active discussions on a lot of it. Some of it we know there will be some terminations. But I don't think there's anything out of the ordinary in the expirations coming up this year for us.

Great, thanks.

Our next question is from the line of David Fick with Legg Mason. Please go ahead.

Good afternoon, gentlemen. Driving into the occupancy numbers a little bit further, I see on page 18 of your supplemental, the 40 bips decline in occupancy but when you look at the stabilized portfolio, I was wondering if you could provide a little bit more detail on that. Your bulk was down actually 250 bips and your office occupancy was up on a stabilized properties. Can you reflect a little bit on what's happening particularly on the industrial side? And do you expect this trend to continue?

Yeah, there is -- an explanation for that. There was -- significant industrial property, one that was completed about a year ago. A little over a year ago and we still haven't leased it. Moved from the unstabilized developments into the stabilized developments about 500,000 square feet. There is another property in Columbus where we took a buyout on a building, 437,000 square foot building in the fourth quarter. The tenant was basically out of business and we negotiated a buyout. And we have that space available as of year end. So, those were the two significant items that impacted the stabilized property bulk occupancy and I would say on that, we are seeing -- we are seeing a pickup in the bulk activity pretty much throughout the system so, we think we'll see some uptick in that in the first quarter.

Okay. The second item is on the G&A expense, I don't want to beat it to death. Others have asked a question but I think I only heard about a million and a half dollars of explanation. In your December presentation which was only a few weeks ago, your guidance at the time was $28.5 million G&A for the year. You came in at $25.5. I'm still a little bit confused about how you had such a positive variance.

This is Tom Hefner. They cut my salary by a third. Now Matt will give you the honest answer.

Really, I think page 26 ultimately will help in that and the supplemental package. The other really big piece of it is in leasing. In the fourth quarter, we had leasing activity that was I think about 2.7 million square feet. On the middle leases and that leasing activity was half of everything we did last year and about 40% of what we did in 2002. As a result, with that increased leasing activity, there was more overhead that was allocated to the leasing division and so that created the decrease in the G&A overall.

Okay. I'm sorry. I don't mean to be a jerk about it but the fundamental question is why didn't you know in December?

Well, I think the answer to that is we had signed some deals in December that we didn't know we were going to get signed when we were up to see you guys on I think the 3rd.

When we come up on December 3rd, we don't even know what the November numbers are let alone the December number, guys.

Ok, good answer, thanks.

A lot of this stuff rattles around. This is an imperfect world we live in.

All right. Don't mean to be an analyst jerk. Thank you.

Now wait a minute. I want to go on record I did not say that that was your comment. Not mine.

Ok, thanks.

Our next question is from the line of Timothy Goebel with Reef. Please go ahead.

My question has been answered. Thank you.

Moving along. Our next question is from the line of Claus Hirsch with Corinthian Partners.

I would like to ask about three specific markets. Atlanta, Raleigh and Columbus. And specifically, targeting the industrial sector. Could you give us some general comments about market conditions in each of those three markets?

Atlanta's market had -- the general market conditions. We've had seven straight quarters of negative absorption. But the forecasts for this year are positive. In our markets, we actually -- in Atlanta, we had 140,000 feet of positive absorption in the fourth quarter in Atlanta industrials. So, you know, we added the Brazilton [ph] building that Denny mentioned to our in-service portfolio. We have good, positive activity on that building. Raleigh industrial is a smaller market but it's experiencing some of the same things Atlanta has. In the fourth quarter, we had 120,000 feet of positive absorption and overall, the market last year had a million square feet of negative absorption but market conditions I think there are improving as well.

Uh-huh.

This is Denny. On Columbus, I would say most of 2002 was a flat to down year on the bulk and on the industrial side in Columbus but we did see some activity pick up in the fourth quarter. We actually -- we did have, as I mentioned, the one building where we bought out the tenant who was essentially out of business. We have several -- a couple of good prospects on that building now. We also signed about a 900,000 square foot deal in a warehouse over in Columbus in the fourth quarter. So, I think activity over there seems to be picking up.

So, would you expect this positive -- positive absorption trend to continue for the balance of this year?

I think in Columbus, I think there will be positive absorption in 2003.

Uh-huh.

And Bob, what is your comment about --

I would say Atlanta as well. I think we've hit the bottom in Atlanta and are coming out. Raleigh is -- I think it is a little tougher to call because it is a smaller industrial market. But I think all trends are at least we'll -- it will be even with last year.

Just one final question. Could you just sort of generalize about the terms being offered to new tenants.

On the industrial side?

In those three markets.

I think in Columbus -- haven't seen a tremendous amount of rent deterioration there. You did see somewhat of an increase in vacancy but I think the terms have held up compared to what they were over the last couple of years. We didn't see a significant rolldown in rent there.

Uh-huh.

In Atlanta, the rents are 2001 over 2002 rents probably went down on the bulk side about 10% to 15%. Good news is that capital expenditures have not gone up. As a percent of total. So, and we're projecting in our budget for 2003, the rents to be the same as 2002. So, really no additional rolldown. In Raleigh, the rents are probably 5% to 10% down from one year ago.

Uh-huh. Ok. Very good. Thank you very much.

Our next question is from the line of Jason Bain with KD Redding and Associates. Please go ahead. Mr. Bain, your line is open.

Moving along, our next question is from the line of Rahul Bhattacharjee with Merrill Lynch. Please go ahead.

Hi. Quick question with regard to your top ten on the list. Could you provide comments on how you feel with regard to your exposure in Qwest, Techalec [ph] and Magellan.

Sure. Rahul, this is Denny. On Qwest, obviously they've had some issues. We feel, I think probably more positive about them than we did probably six or nine months ago. Their business seems to have stabilized. They entered into a deal to sell the yellow pages business. And it has been pretty quiet on that front lately. So, on Techalec, [ph] we also believe that -- we think they're pretty solid. We -- we're not aware of any issues there and Bob, I'll also let you comment on that after I comment on Magellan.

Magellan obviously has some financial issues. But the truth is Rahul, those -- they're rolling out of those leases here in actually in January of this year. So, those leases are expiring anyway. So, unfortunately, we'll have a little bit more vacant space to release but we won't have the Magellan credit issue.

Do you think you'll get back most of the 3.7 million square feet or a majority of it or do you guys not know at this point?

That's not square feet, Rahul. That's dollars.

I'm sorry, $3.7 million.

I think we're getting all of that Magellan space back, aren't we, Bill?

Yes, we're getting it back. They're moving and we chose not to go after their business. And they're in a building that has City Mortgage in it and they've leased the rest of the building and we're optimistic that we'll back fill their space and -- in short time.

Bob, do you have any other comments on Techalec [ph]?

No, other than to say we follow them closely. They're making money and they have $100 million in the bank.

Ok. And then a follow-up with regard to your lease exposure the next 24 months. Can you just provide us a very broad sense of what the mark to market is on the office side and on the industrial side?

Well, Rahul, you know, those leases were probably done at many different periods of time. I think in general though, as a comment on the office side, we feel that the market rents are maybe 5% off what our average rents are across the board and that's a very blanket statement. It is very hard to go back unless you look at lease by lease over the next two years expirations. On the industrial side, it is probably a little bit less than that. So, I don't think we've got any significant market rent exposure on those leases that are rolling.

Look at it this way, Rahul. The last year we rolled up all of the renewals 3%. Okay. That was down from 13% the year before. And so while all of those spaces have been budgeted, we've not rolled them up to just look at that universe but it was a 10% growth in '01. A 3% growth in '02 and so you could factor that into Denny's comments to get a sense of the next year.

All right. And then finally, with regard to the new appointments that are being announced today. Have either Gary or Gene's functional responsibilities changed as a result of today's announcements?

Rahul, let me say that they finally found something that was appropriate for Gary and I, Chairman of Ice [ph].

Our lead director introduced him to the rest of the directors as both of the Chairman of Ice so I can assure you they have those new responsibilities. Let me just make a couple of comments since nobody -- Tom has gotten all kinds of bizarre questions and I don't want to get into all of them but suffice it to say, the most important thing that a board of directors has responsibility for is succession plans. We've spent time bringing this in. Tom has gotten weird questions like am I going to leave the company so I can compete and make more money. You know, those questions could be asked of companies that don't have sort of the moral fiber or Boy Scout nature of our company. Suffice it to say I've made a lot of money here. We all have a lot of loyalty here and anybody -- you know, there is nothing on this agenda that is different than what we're -- than what is. There is a complete process we're going through.

I have a great deal of confidence within the people within the company today to lead the company to the next generation. Obviously boards of directors have the right to choose my successor but we are pretty well in sync of where we're heading. We will -- you'll see an orderly process over the next 15 months for a new CEO to be named. And over the next 27 months, for a new chairman to be elected. Clearly, it is my belief that a CEO who has been with the company as long as I have, has no role to play on the board after a reasonable transition from CEO to chairman then off the board. So, the reason I would go off the board when I relinquish my chairmanship is I believe that is the proper way to run an ongoing business. Anybody that has any other questions about these issues, I'll be happy to address. Whenever it is appropriate.

My personal goals will be to retire from business. Because there's other things in life. And I have no interest in starting any other business because I would hate to compete with this business which happens to be one of the better run businesses in the world.

All right. Appreciate the comprehensive answer. Thank you.

Ladies and gentlemen, if there aren't any additional -- we do have's question from the line of Kevin Lampo with Edward Jones. Please go ahead.

Hello. Can you provide kind of a flavor for with your leasing activity, are these tenants, are they consolidating space at your locations? Are they expanding locations? Just moving space? Can you kind of give a flavor on what you're seeing in the market as far as leasing expansion or contraction or whatever for various tenants?

I would say it is a mix. Mix of everything. I think we're seeing some expansion of tenants. We're seeing some relocation. But there's still a little bit of downsizing going on. But we're also seeing new tenants come into the market. New opportunities. And I would say particularly on the industrial side. We're seeing that activity.

We also seem to be -- we're doing a lot better job of cross selling across our cities. And so we're getting far more deals and multicities from the same company. And Denny and his group have instituted a national accounts program that's made a significant difference, you know, all of which has helped.

I think the other thing that I would just add is that, you know, we pride ourselves on continuing to communicate with clients. Even in a bad environment. A lot of our competitors will tend to put their head in the sand and hope it all goes away. Which is a great way to get disconnected from your client. And I think our guys are doing a terrific job of working and talking to clients and trying to make win-win situations.

Thank you.

Our next question is from the line of Gary Freeman, representing Gem Investors. Please go ahead.

Denny, or anybody else, just expand on the point of the fundamentals -- bottomed across the portfolio. Is there a distinction to be made between suburban office and industrial?

I think there is a distinction to be made but I would say that on both sides, we really feel like we're at the bottom and I think if you look at sort of the occupancy statistics, you see that. Looking at the -- one other indication, I think is the buyout activity. Probably for the first three quarters of this year, the buyout activity was more significantly on the office side and then we had a few on the industrial -- a few more on the industrial side in the fourth quarter. But again, we are -- our sense is that those are starting to slow down.

In terms of rent rolldowns on the suburban office, that's also -- should be pretty negligible looking out.

That's our sense today.

Right, right. Great. Thank you.

Our next question is from the line of Jim Sullivan from Green Street Advisors. Please go ahead.

I hear comments regarding fundamentals bottoming out. But when I look it at the market, I look at vacancy numbers, 15% to 20% office and industrial. Little more than some. Little less than others. How do -- how do effective rents, especially in office, not drop further given those market conditions?

As always, you have to look at submarket activity, too. And the submarkets and the quality of the parks. We always believe that we have the best parks in our markets in the best submarkets and those always hold up better. And I think traditionally, if you look at our occupancies versus the market, we have done better than the market by our goal is always to be a five percentage points ahead of the market. And so I think those are things that you also have to factor in rather than just look at overall markets statistics.

What is your best guess as to what's going to happen to effective rents in your markets let's say for office by the end of '03 and for industrial by the end of '03?

My sense is that again, I think we're at the bottom of where those effective rents are going to go. We're very close. You know, even over the last year, like say on the office side, we've -- it hasn't been like it has been in past cycles where you have six months free or 12 months free on an 18-month lease kind of thing. There's been maybe a two or three months of factored in and the net effective rent on the office side, less than that on the industrial side. We haven't seen that getting worse over the last couple of quarters.

A couple of comments I'd make, if you look at the pipeline of supply, coming into the market here at the beginning of '03 versus back at the end of '01 or the beginning of '02, it is substantially different. For the first part, it is reflected in our -- under development occupancies. Developers are not building spec space for the most part so anything that's in development pipelines now -- the spec space has been washed out and this is primarily build to suit activity that's coming on-line. You have that component of supply that's cut off. The other thing is that we aren't seeing the giveback of sublease space that was there a year, year and a half ago. That -- pretty much everybody that needed to do that strategically has contacted their landlord and for the most part, that's washed out, we think. So, I think with the supply cutting off and we do see, as Denny said, a slight increase on the demand side, the fundamentals will change.

Bob, you want to add a comment?

I think they've covered it.

You showed a slide during the analyst meeting that showed in each of your markets, your occupancy versus the market occupancy. And in almost every case, your occupancy was many percentage points higher than the market. I think that speaks to the prowess of you guys as an operator. But it also makes me question when a guy across the street from your 100% leased building is sitting there with 20% leased, are you finding that those guys are increasingly targeting your tenants and that your tenants are using the offers being made by the guy across the street or around the corner to really strike better deals with you guys.

Well, Jim, I think that's always the case. In good or bad markets, tenants are out there negotiating with everybody. For the best deal. It constantly happens. I think again, all I can say is I don't think we've seen a significant impact on our net effected from that. Obviously our role and our net effective has shown in the statistics that we present, have slowed and as Tom mentioned. But we haven't seen that that's having a huge impact on it.

Jim it, costs a lot for a company to move. And you know, the real estate part of their operating expenses -- expenses is typically one of the smaller line items. It is their people. It is their transportation cost. It is telecommunication and wiring. It is a lot of other things that are very expensive and put at risk when you relocate your company. So, we -- you know -- if our competitors are undercutting us by 10%, they're not undercutting us by 50%. Incrementally, it is not a value add for a company to upset their operation and move.

You never want to be afraid to ask for a premium. And the question is how much is the client -- how much of a premium is the client willing to pay. And you know, and that gets under constant pressure and it is a constant game of chess. But we have been -- this group has been pretty good at that game for a long time and that's what our job is.

Thanks. Then finally, on your FAD [ph] ratio, over 100% for the fourth quarter. Based on your expectations for '03, is that going to stay above 100%?

We hope. So

Yeah, I think we sort of touched on that earlier. I think it will stay up at that level, you know, as long as we keep getting some leasing activity and hopefully as our occupancies begin to pick up this year. It will stay up at that level.

But it should come back to a more normal level sometime in some quarter in '04, you know. With first, second, third, fourth. And get back to a more normalized run.

Is free rent having a meaningful impact on your portfolio, the free rent you're offering to tenants?

No. Again, I think we have seen you know, in certain situations, where you may have two or three months on an office lease, you really haven't seen much of all of that on the industrial side. And that is an -- isn't obviously in every case. That's on larger leases. So, I don't think it's having a significant effect in our markets.

Thank you.

Our next question is from the line of Heath Richy with Sell Through Management.

Hello. Are you looking forward to any significant increase in real estate rents -- I'm sorry, real estate taxes in any of the markets that you're serving?

This is Bill. I'll take a crack at that. We actually -- real estate taxes over the last four years in a lot of markets have been on a steady increase as taxes in general tend to do. And in a number of our markets, we've actually employed a strategy of contesting the taxes. And we're not alone in that and we've been -- we prevailed in many cases as to the assessment formulas and you know, the appropriateness of certain tax structures.

And what we're seeing is that actually, it is leveling out and potentially declining in many markets. That the real estate taxes will not continue to escalate like they have. Now, that's not true in every market. But in many of our markets, it is true.

Okay. Is there any particular market where it's more of a problem than others?

Well, I think it's always an issue in the larger cities where there's -- there's more municipal demand for dollars. More of a machine. I think it is always an issue in Cook County, Chicago, it is an issue in Minneapolis. Those would be the two that would come to mind.

Right, but we really haven't -- across the board, we haven't seen any increases. We've actually seen some decreases in some of the real estate taxes because of some changes and some of the states we operate. We've actually seen some decreases. Again, I wouldn't call them significant but we've seen some.

Remember, we are pretty good at passing through operating expenses to the tenant in the lease.

Sure.

While it is important to us because our tenants pay it, our tenants do pay it. Right. Thank you.

Gentlemen, there are no further questions at this time. Please continue.

Ok. Thank you, operator. And I thought I would point out to you we'll be announcing first quarter earnings April 30th. That's the current schedule. We'll anticipate having the conference call at 2:30 eastern time on May 1st. Thanks and have a good day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. And for using AT&T's executive teleconference service. You may now disconnect.