Duke Realty Corp (DRE) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And 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 session. Instructions will be given at that time. If you should require assistance during the call, please press star and then zero. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Tom Peck, Senior Vice President of Investor Relations and Capital Markets. Please go ahead, sir.

Thank you, Emmy. Good afternoon and welcome to the Duke corporation third-quarter investor conference call. I am joined today by our president and Chief Executive Officer, Dennie Oklak, by Matt Cohoat, our Chief Financial Officer, and by Bob Chapman, Senior Executive Vice President of Real Estate Operations. In just a minute Bob and -- or excuse me, Dennie and Mat will provide some opening remarks and then we will be pleased to take your questions.

But first you should know that as we make forward-looking statements today that those statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Some of those risk factors include our continued qualification as REIT, general business and economic conditions, competition, increases in real estate construction cost, interest rates, accessibility of debt and equity capital markets, and other risks inherent in the real estate business and for more details about those risk factors we have an 8 K on file with the SEC dated July 24th, 2003.

And with that, I will turn the call over to Dennie.

Thanks, Tom. Good afternoon, everyone.

FFO per share for the quarter was 62 cents. The midpoint of the guidance we provided on last quarter's conference call. Our estimate for the fourth quarter is 65 cents to 67 cents per share, which will put us at $2.45 to $2.47 for the year. This will be at the midpoint of the guidance we provided last year at our investor conference in December when you adjust for the two-cent per share charge for preferred stock redemption we completed in the fourth -- first quarter, which was not factored into our guidance. It is our intention to announce our guidance for 2005 at our upcoming investor conference in early December.

In reflecting on these results, the one area of disappointment continues to be the occupancy of the in-service portfolio. We ticked up only slightly for the quarter and this area continues to be the tough toughest part of the business. The one area of obvious difficulty is our service center product. Part of this is one lease buyout in Rally, but also the tenant base in these properties is typically smaller, locally owned companies which struggle with the sluggish economy. This lower service center occupancy is consistent what we have seen in previous economic downturns and, quite honestly, we do not see a significant improvement in the near term.

On the positive side, we are seeing good activity in our value-creation side. The overall pipeline is the highest it has been since the end of the third quarter last year. And as we have been indicating all year, the fee percentage on our third-party construction business is increasing as reflected by the 8.47% fee percentage on our current pipeline versus the 6.84% on the pipeline at the beginning of the year. One transaction to note. Early in the third quarter we started at 667,000 square-foot speculative bulk distribution facility in our Groveport Industrial Park on the southeast side of Columbus. During the quarter, we signed a 10-year 506,000 square foot lease with McGraw Hill in this property. We anticipate increased progress in our value-creation pipeline during the fourth quarter in both the held-for-rental and third-party businesses.

On the capital recycling side we also had a good quarter. We closed on the sale of over $100 million of held-for-rental properties. The major portion of these sales were at Gwinnett Park in Atlanta. There we sold 25 buildings with an average age of 21 years at a 9.2 % cap rate. These were all service center and smaller bulk properties.

On the acquisition side, we closed on over $200 million of properties with an estimated stabilized yield of 9%. The largest acquisition was the Northwinds office portfolio in the Georgia 400 submarket of North Atlanta. This portfolio consists of six office buildings totaling 914,000 square feet, all completed since 1997. We are very pleased with this acquisition and our cost basis which we estimate will be in the $150 per square foot range, including costs to lease the properties up to 95%. This acquisition along with our existing properties gives us a 36% share of the class A office product in this submarket. We also own 64 acres of land that will support over 1 million square feet of additional new office development in the submarket. We believe this is the best truly suburban office submarket in Atlanta and we are confident about the long-term prospects there.

This recycling activity continues our strategy, uh, of upgrade ing the quality of our portfolio by selling older assets and redeploying that capital into newer, better quality and better-located properties while also increasing our returns. We have also recently announced two initiatives, which we believe will help us grow our value-creation pipeline. The first is a project in suburban Indianapolis to be known as Anson. Anson will ultimately consist of over 1,700 acres of mixed-use development, including an estimated 7 million square feet of industrial product, 2 million square feet of office and medical office facilities, 1.5 million square feet of retail and outlot development, along with over 1,000 single and multifamily residential units. We spent the last year working closely with officials in Boone County to obtain the necessary entitlements and utilities and have now closed on the first 300 acres of the park, which represents most of the increase in the land held for development on our balance sheet during the third quarter. We have options to acquire the remaining 1,400 acres at fixed prices through 2011.

The county is now finalizing some tax incremental financing to help pay for a portion of the infrastructure costs on the land we have purchased. We anticipate beginning construction of the infrastructure in the spring of 2005 and to begin our first development late in 2005. We are partnering with an Indianapolis-based residential lot developer to develop, uh, the residential infrastructure and also anticipate residential land sales to begin in late 2005. Anson is located along Interstate 65 and continues our long-running development strategy on the northwest -- northwest side of Indianapolis. It is located halfway between our Park 100 and our Lebanon Business Park developments. We are very excited about this project, which provides us an opportunity to shape a community over the next 10 to 15 years.

The second initiative, which we announced this morning, is the formation of a 50/50 joint venture with Bremner & Wiley to develop medical office facilities. Bremner & Wiley has developed over $500 million of health care facilities and currently manages over 3 million square feet of such facilities in the mid-west, south, and eastern regions of the United States. Duke will provide project financing and construction services and Bremner & Wiley will provide business development services as well as on going leasing and property management services to the venture. We see this as a win-win situation for both organizations and will provide Duke with an opportunity to enter this fast-growing health-care-related real estate arena. Both Anson and Bremner & Wiley joint venture provide us with the opportunity to create shareholder value through our strong balance sheet as well as our vertically integrated development team. These initiatives allow us to expand the scope of our real estate expertise and serve a broader customer base -- customer base translating into creating more value.

With that, I'd like to turn it over to Matt Cohoat for a few comments.

Thanks, Dennie.

I would like to briefly explain a few of the operating variances that occurred during the quarter. Property rental expenses increased 16.7% or $5.8 million for the quarter compared to 2003. The primary reasons for the increase are 2.5 million related to asset additions, 1.2 million related to the timing of maintenance expenses, and 1.3 million of higher utility costs through a greater proportionate amount of office-property net additions. The increase in 2004 third-quarter real estate taxes of 4.6 million again relates to 1.7 million from asset additions, and the third quarter of 2003, including a 2.3 million reduction in real estate tax expense through reassessment of Minneapolis taxes. The significant increase in depreciation expense is a result of net property additions and the application of FASB 141 to newly acquired properties, which has resulted in an allocation of purchase price to in-place tenants with substantially shorter remaining economic lives, thus accelerating the depreciation of the assets. These two factors created nearly 60% of the 15.2 million, 2004 third-quarter depreciation expense increase. The remainder of the increase in depreciation expense primarily relates to the depreciation of tenant improvements that now comprise a greater portion of our asset base as we will re-lease the portfolio.

Our overall pool of overhead increased for the quarter compared to the prior year by $5.5 million. 2.2 million of the increase is a result of increased performance-based compensation accruals primarily through GAAP-required accruals on variable compensation plans. In addition, salary and related employee costs increased by nearly 2 million as related to increased construction and leasing staffing to support the national and development group as well as increased development activity. Our same-property performance for the quarter is an increase of 4%, which is unusually high as a result of greater lease termination fees during the third quarter of 2004 compared to 2003. The quarterly same-property performance will tend to be more volatile than year year-to-date results. We currently expect 2004 same-property growth of 0 to 1%, which is in the middle of our range we previously provided. Termination fees for the quarter were $5.2 million comprised of over 50% from one tenant, with a termination option, as well as two additional tenants in bankruptcy from which we received approximately $1 million. We have substantially backfilled all of this space. We expect 2004 lease termination fees to total 14 to $15 million for the year.

With that, I will turn it back over to Tom Peck.

Emmy, we are now ready to take questions.

Ladies and gentlemen, if you wish to ask a question, please press star and then one on your touch-tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment, please, for the first question. And our first question comes from the line of Chris Haley from Wachovia. Please go ahead.

Thanks. Good afternoon, everybody.

Hi, Chris.

Um, Matt, could you help me get a look at your diluted share count just for modeling purposes going forward?

It's, uh, right at 157 million.

Okay. And, uh, is there going to be any adjustments to that?

It --

You know, like --, etc.

No. It should be consistent with the -- what you've seen for the first four -- first three quarters of the year.

Okay.

The only thing that really will affect that will be stock-option exercises, and that's not significant.

Okay. Uh, could you refresh my memory, uh, what the expectations were for, gain, on land and gain on asset sales that you include in FFO for the full year?

Our original estimates from last December on gain on land sales was 3.5 million to 7 million.

Okay.

And, uh, the gain on properties held for sale, net of taxes, was 6 million to 10 million.

Okay. I'm assuming there were just some extraordinary opportunities to sell that got those numbers up to the higher end?

Uh, yes. And we also were able to perform better on the projects as we completed them and -- and took them to market.

You wouldn't happen to have the margin on the sales, would you?

Uh, no, I don't.

Okay. Could you or Dennie, could you provide a little bit -- could you go through those numbers again related to the Indianapolis project in terms of how you break it down by use and square footage, and then also provide some timing on, you know, when some of the commercial might be coming in?

Sure, Chris. Um, as I said, we'll have over 5 million square feet of industrial property up there. Uh, we would like to think that we could start, uh, the, um -- excuse me, over 7 million square feet of industrial and we'd like to think we would get started on that, again, towards the end of next year. We don't require a lot of infrastructure to start on the industrial piece, but we will require some. The -- there's going to be a million and a half square feet of retail and outlot development. That -- that will be beginning again next year. Some of the retail we can start on really without any of the infrastructure. Some of the outlot and some other things are gonna take a little more time. I wouldn't think we'd -- we'd see -- we'd see more development beginning in 2006 on that. Um, the -- we talk about the 2 million square feet of office and medical office. That's on some ground that we have options on out further in general. So, uh, I would say that's probably at least three -- three years, maybe four years out before we start some office development up there, unless we get a build-to-suit opportunity. And then on the residential side, again this includes some -- some acreage for about, uh, a little over 600 single-family homes, which is -- are located in one of the best school districts in suburban Indianapolis and again that's just a timing of infrastructure issue. And, you know, we're not obviously building homes here but we are partnering up with a local group that we know well to -- to help us with the infrastructure, and then we'll sell those lots to homebuilders and we think that will start occurring in late 2005 and probably be a three to five-year cycle to sell that residential land. And then on the multifamily, uh, again as soon as we can get the infrastructure in, we have people interested in -- in buying that land and beginning the multifamily development. So that will probably be early 2006.

What is the cost assumption on the commercial that you would care to derive? What is kind of the buildout assumptions?

Um, not sure what your question is. On the infrastructure, or cost per acre, Chris.

You should put 30 bucks for the industrial and, uh, you know, 30 bucks a foot for industrial and a longer term, you know, 100 to 150 million -- $150 a foot for the office -- medical office and then make an assumption on retail and that'll be -- the outlays over time?

Yeah. I'd say you're -- you're probably right on the 30 bucks for industrial. I would say the office is probably gonna be more in the $120 a foot range. And the retail, you're probably -- I think you said 150, uh, that's probably, uh -- that's probably about right.

Okay. And the last -- on the tiff. What size is the tiff that you're looking for?

Well, it's gonna come in a couple phases. Uh, the first phase is about, um, 5 million.

Okay. Okay. Great. Thank you.

Thanks, Chris.

And we have a question from the line of Jerry Callaghan from Goldman Sachs. Please go ahead.

Dennie, you mentioned in your opening remarks that you you'd continue to be an active capital recycler. You were able to do in the quarter at really almost no dilution, which is nice. You know, A, do you expect to be able to do that at that kind of very minimal level of dilution going forward, or was this unusual? And then, secondly, I know you didn't really comment -- or you're not going to comment so much on 2005 here, but the level of capital recycling, as you think about 2005, will it be kind of equal to the -- to what you did in '05? Sorry, in '04?

Sure, Jerry. You know, we've -- we've really intentionally tried to balance, uh, our capital recycling program. We've said that we want to, uh, remain a net -- net acquirer really in 2003 and year-to-date in 2004 we've been able to do that. Um, so some of the -- the determination of the level of dispositions will be how much opportunity we see on the acquisition and new development side. But, uh, having said that, just looking to next year, I would think that we believe that our levels on both the disposition and acquisition side will be very similar to what they've been in 2004.

Okay. Thanks. And, uh -- and the dilution, you know, in terms of the cap rates, what kind of spread do you think we should think about?

Well, again, what we've tried to do and we've been pretty successful at in general is, uh, getting about 100 basis point positive spread. So -- so the acquisitions are 100% higher -- 100 basis points higher than, uh, the dispositions. And we've so far been able to accomplish that.

Great. Thank you.

And we have a question from the line of Jonathan Litt from Smith Barney. Please go ahead.

Hi, it's John Litt. I'm here with John Stewart. I'm trying to understand this mixed-use project a little bit. So you're going to sell off the land for, uh, the single-family lots, is that right?

Yes.

What do you think the gross proceeds will be on that?

Um, you know, John, I don't have that in front of me.

It's 600 lots, you think it's like 50,000 a lot, or is it like 200,000 a lot?

It's gonna be in the 50 to 70,000 a lot range.

And you'll run that through FFO?

Yes. That'll be run through our gain on the land sale.

And the same with the multifamily lots, I guess?

Yeah. The multifamily will -- again, will just be land sales to, uh, other multifamily town-home developers.

All right. It's going to create a -- it's going to inflate your earnings for a period of time.

Well, we hope so.

As it gets unloaded, but it's a finite asset. I mean it's a depleting asset I mean. Is this a mixed-use project, is this kind of a one off, or do you think there's more opportunities like it.

Well, John, we haven't done one quite like this. We We've -- we've done little pieces and parts, but, uh, it's not every day that an opportunity -- you know, in such a great location to control 1,700 acres, comes along. So, uh, it's probably not something that's gonna happen every day. And really when you look at it, uh, for us the driving force, when we begin to look at this project, was, uh -- was the industrial. And you know we've had great success here in Indianapolis on the industrial side and it's been a great market for us, as well as some other people. And we think this is just a perfect location. You know, uh, you've -- you've been here and seen Park 100, which we developed really over about 30 years starting in 1972. Uh, and it's about 1,700 acres. And then, um, about seven years ago we started Lebanon Business Park, which is on up I-65 a little bit further north and we've developed about 7 million square feet up there that's 100% leased in the last, uh, six, seven years. And this is right smack dab in the middle of those two, right on the Interstate with great access. So what really drew us to this project was the ability to do, you know, five to seven million square feet of industrial. And then, uh, we believe that the other opportunities there on the retail side and just the land basically entitling the land and reselling it gives us an opportunity to generate some profit. So that's why we pursued the whole thing. And, uh, it -- it is something -- I think this is a little bit similar to the Camp Creek development that we've done in, um -- in, uh, Atlanta, except we opted to -- we didn't partner up, but we partnered up on the tip with another, uh, retail developer down there, and they did some retail and we're doing the industrial.

Right. And in the past I think at Tuttle Crossings you partnered up with somebody to build the retail?

Yes. We did just a little bit of retail over there that actually Toddman built the mall there.

Right. So I mean it -- you know, you're getting a little bit into the -- into the residential business in this transaction more than you typically do. What -- on the order of magnitude, do you think that'll be 25% of the total value of the enterprise or more or less or can you estimate that?

I would say of the total value of -- of that project, the residential piece will be about 10 to 15%.

Thank you, guys.

Thanks, John.

And we have a question from the line of Keith Mills from UBS. Go ahead, please.

Hi, guys, good afternoon. Keith Mills with (inaudible) and have a few questions for you. Maybe more for Dennie or for Bob. And I'm referring to pages 30 and 31 on your supplemental. In looking at the new bulk leases, it looks like the average term sequentially has been on the rise, specifically here in the third quarter it rose. And then if you look at the -- also the duration of the leases for renewals on the office side, those are also up. Bob, could you talk to us about why that's occurring? Is that something specific, a strategy that Duke has? Or are you finding you're just able to do that in the marketplace at this point in time on, uh, the bulk with new leases and the office renewals?

Uh, yeah, Keith. Well, on the bulk leases, the primary reason that went up is the McGraw Hill lease that Dennie mention mentioned earlier in Columbus where we leased 500,000 -- 506,000 feet. And, um, you know, we are seeing longer terms on the office side as well. So, uh, you know, we like to -- we like to take as much money as we can when they'll give it to us.

Okay.

I think what we're seeing on the office side right now is -- is people are taking advantage of the market conditions today and trying to lock in some longer term leases that -- what they -- they believe are probably low rates compared to what it'll be hopefully here in the -- in the not too distant future.

Okay. Thanks. Appreciate that. And a couple other questions. Looking at page 32 of the supplemental. This space that was vacated due to default and bankruptcy in the service center area was up year-to-date relative to where it was for all of 2003, wondering why that's the case. And then, also, in terms of, uh, contractions, that area on page 32 year-to-date's 2004. That's running similar to where it was in 2003. Was wondering what kind of thought you could happen in that area in terms of looking out to 2005 and then maybe if you could comment where shadow space -- where you believe shadow space is in your portfolio for both bulk and for office at this point.

Well, let me take a crack at that, then Bob you can chime in. You know, we're still seeing, uh, some -- some tenant defaults out there. Um, and -- but -- so, again, if you look at our level of lease buyouts and things that have happened, uh, our bad debts really have stayed relatively low. The tenants that -- that have vacated, even though they've had financial trouble, will receive some kind of buyout from. Uh, but if you look at our trend, uh, the buyouts I think two years ago we had a high of about $28 million in lease buyouts and now as Matt said earlier, we expect this year to be in the 14 to $15 million range. So they are lower than they were a couple years ago. But even at our lowest point when the economy was ticking along, we were still getting, say, 6 to $8 million of leased buyouts a year. So we're slightly above that right now. Those are really hard to predict, but, uh, again, we know that we kind of have a floor of probably six to eight million going forward. Um , then on the shadow space, uh, I don't believe that there's a lot of shadow space out there right now. I think a lot of that's rolled. It's translated into real vacancies for us and obviously other folks. And, uh, I don't -- I don't sense that increasing. I think it's down pretty low right now and I don't sense that increasing a lot in 2005.

Keith, it's Matt Cohoat, just a couple of -- trying to answer some of your specific questions. The -- in the default and bankruptcies on -- in the third quarter. One was -- was a large office tenant that makes up almost all of the 170,000 feet that -- that we have actually been -- they were going to move out of the space about 18 months ago. We're struggling, but we were able to keep them in for an extra 18 months at premium rents until they moved out. So it actually was quite a positive as we kept some space leased and actually were able to start marketing the space that they were moving out of. The other thing I would mention is that we're -- we're about the same on the total square footages but it's -- it's clearly skewed more to the bulk on the square footage basis. The number of -- of defaults or bankruptcies we're seeing for 2004 is only about 60% or so of what we were seeing in 2001 and 2002. So we clearly have seen a pretty significant reduction from our high point a couple years ago.

And the only thing I'd add, Keith, on the -- on the shadow space is we are now seeing, as Dennie -- or Matt mentioned earlier, on terminations we're seeing a lot of that space being backfilled immediately or there are subtenants already in place so we just do direct leases, and that occurred on almost all of those terminations in the third quarter.

And we have a question from the line of Jay Leupp from RBC Capital Markets. Please go ahead.

Thanks, good afternoon, here with David Copp. Talking about your dividends for a moment. 110% FAD payout this quarter and 114% for the year. Could you tell us where you see that ratio trending over the next couple of quarters? And then on top of that, give us your thoughts as to where you see TIs, commissions and non-revenue generating CapEx going in the fourth quarter and into 2005?

Uh, sure. We -- you know, we said last year at our investor conference that we really expected, uh, 2004 that our FAD payout ratio would be in that 110 to 120% range, and that's where we've been running most of this year and where we anticipate ending the year up. And, again, I think looking into next year, uh, there's still -- there's still plenty of vacancy in most markets on the office side, and so we are still seeing fairly high capital requirements on re-leasing the space. And a few markets I would say in the second half of 19 -- or 2005 we'll start to see that tick down. And then on the industrial side, uh, again there hasn't been a real significant fluctuation over the -- this downturn in the amount of CapEx we put on the industrial side -- on the bulk side. A little bit more on the service center side, which again we would -- we would anticipate that on the service center side in 2005 until some of that space gets taken up, they'll remain relatively high.

Jay, this is Matt. On the non--revenue generating building improvements. This quarter was a little bit higher than normal. As we have consciously first of all it's a good time to do work on the properties during the third quarter from a weather standpoint. And, secondly, we've consciously looked at some problem lease properties and have worked to clean those up to help re-lease those. So they're -- in a way, they are revenue generating as we move forward.

Okay. And then in terms of new development, given the low cap rate environment we're in for acquisitions, where are your current hurdle rates for new development, and, uh, how do you expect those to change over the next four or five quarters? And you'd also made the comment that you were gonna be either net acquirers or net developers when you compare what you're doing externally in terms of growth versus your asset sale activity. Can you give us your thoughts on, you know, given where we are with asset sale cap rates, uh, how long you intend to be active, selling assets and, you know, if they move -- start to move up when you'd stop doing it.

Well, I think that we're -- we'll probably never stop selling something. We're -- you know, our philosophy is to keep pruning the portfolio. And when you've got 115 million square feet you're always gonna want to have something out there on the market that, uh, is either getting older or doesn't meet your criteria. So, our plan going forward is to always have this recycling program going on. On the investment side, if you will, um, you know, cap rates are -- it really depends. There's a pretty wide variety of cap rates today. Obviously, if we're pursuing an industrial build-to-suit with a good credit tenant on a long-term lease, uh, those cap rates are pretty low right now. The yield rates that we'll develop at are probably in the mid-to high sevens today. Because we can -- most of those products we'll turn around and put it in our held for sale portfolio and we know that we can dispose of those at still a pretty significant profit. On the -- on the build-to-suit on the office side, uh, there are probably to date around 9%, maybe a little bit less than that if it's -- if it's a real high credit tenant. Um, and then it -- we vary a little bit from market to market on our speculative product as to what we think we can get. But in general on our speculative product, uh, including all the -- the interest carry to lease the property up, all of our internal costs, uh, we're -- we're looking at between 9.5 to 10.5% return to take any speculative risk today.

Thank you.

And Jim Sullivan from Green Street has a question or comment. Please go ahead.

Thanks. Dennie, can you help me understand the health care joint venture? It seems like it's a bit of a departure from what you guys have done historically. I know -- I think I remember a few years ago you built a medical office building, but again this seems like quite a departure from your traditional office, industrial and retail development programs. How did this come about and why is -- why should we be confident that you guys can be successful in the health care arena?

Good question, Jim. Yes, we've dabbled in the medical-office business over the years and we really got out of the business. And the reason that we got out of the business for the most part was, uh, it's just really a different game on the management of these properties. There's different rules that you have to play by, uh, there's just a different quality that the buildings have to be. So we never convinced ourselves that we wanted to commit that much time and effort to developing that management expertise. But Bremner & Wiley is an Indianapolis-based company that we've known for many years and we've actually, um, built a number of buildings for them here in Indianapolis and a couple other places. They've hired us to be their third-party contractor. And what happened is they've really grown their business significantly over the last four or five years and we're really looking to and have built great contacts throughout the health-care community, are well regarded and well respected. And we -- again, we really think this is a win-win situation because we are able to -- obviously they're a private company and it's tougher to get, um -- to get financing. We -- we have a balance sheet that can help them with their financing. We have the in-house construction capabilities that can help them, uh, build the properties and get them to completion, which again we know well because we've done several for them. They have all these great contacts in the health-care community or will get the leads for us and they've really developed the expertise in-house to manage the properties. So we, again, think it's win-win. We think it's really, uh -- it's really not any risk for us because we know the side of the business that we're providing and, uh, they know well the side of the business they're providing, so it's just, again, as I said, an opportunity for us to, uh, expand our -- our great development capabilities to another customer base, if you will.

And can you put some parameters around how much capital might be deployed into the venture?

Well, uh, based on -- on their historical experience and on what we think we can do as a combined group, if you will, to expand this a little bit geographically, uh, we would estimate that we'd be between at least starting out next year 50 and $100 million of development on -- on the medical side in, say, 2005.

And the release says your role would be to provide project financing and construction services so in terms of the returns you get there will be some fee income from the construction services and then what, some interest income?

Yes. And then in addition we'll be 50% partners. And the real business model here is, uh -- it's gonna be a held-for sale for the most part. That's Bremner & Wiley's business model where they've developed them and stabilized the properties and then put a package together to sell them.

Okay. That helps. Thanks for that. And then look ing at your office portfolio, some pretty sizeable sequential drops in occupancy and your Saint Louis and Chicago office portfolios. Can you provide any commentary on what's happening in those two markets?

Jim, this is Bob. Uh, yeah. In -- in Saint Louis we had a -- we relocated GMAC from one project to the other from the NGIC buildings that they were in over to Riverport Tower. So the backfill space became available and that's the reason for that occupancy increase.

And they downsized, Jim.

They downsized but we subsequently added Boeing to that project for 90,000 square feet, so the occupancies have come up slightly. And then in Chicago, uh, Budget Rent-A-Car, which, you know, went into bankruptcy a couple years ago, uh, they've been extending with us for a couple years now and they're finally gonna vacate about 150,000 square feet at Central Park Carlyle, and that occurred during the quarter.

Okay. Thanks for that, Bob. And then do you guys have any incentive compensation programs where the appreciation of your share price is gonna result in some G&A expense that we've seen with other companies?

Uh, Jim, yes. We have one program that's called our shareholder value plan. And it's a variable rate -- or variable interest plan. And that was, in part, uh, the GAAP accruals on that created an increase during this quarter and we have to adjust it each quarter based upon the movement in our share prices.

Well -- but -- and Jim. What that's based on is our performance against both the [inaudible] equity index and the S&P 500. So it's not an absolute movement in our share price, it's how we perform against those. And -- and we've performed fairly well against those.

That -- that's good. These absolute programs are -- well --

Yeah, we don't have --

-- on your call. But final question for you. Um, Gene Zenk, does he have a none compete?

He does not.

Do you have any thoughts on -- on his current intentions or efforts to put together some sort of institutional fund that might end up competing with you?

Jim, that was two final questions.

Jim, I don't really have any comments. I think Gene wants to stay involved in the real estate area and he's gonna do some things and I'm not -- we -- we're really not overly concerned with it and, uh, I -- I have absolutely no problem if anybody wants to know what -- what Gene's up to to give him a call.

Thanks, Dennie.

Thanks, Jim.

And we have a question or comment from the line of Paul Morgan from FDR. Please go ahead.

Good afternoon. What was the amount of -- of land you put on the balance sheet related to Anson in the third quarter?

Uh, it was a little bit over 40 million.

40 million. And you said that you will be commencing land sales in the second half of next year for the multifamily component or the residential component.

It will probably be late next year, probably not till the fourth quarter.

Okay. So not particularly material for next year's FFO, then?

Um, no. I think that's a fair statement, yeah.

Okay. On the -- the lease term. Do you have what same-store NOI would have been ex-lease terms?

For the year it's -- it's -- for the nine months, it's the same. Really the amount of lease buyouts we had the first nine months of last year and the first nine months of this year are almost identical.

Okay. And you gave -- sorry, your year-to-date numbers, 14, 15 million, what -- for the full year, what was the year-to-date number, then?

The year-to-date is right at about 10.

12.

12. I'm sorry, 12.

Okay. So you're expecting another two to three million in the fourth quarter, then. On the -- on the health care side, the -- the MOBs, are those -- what -- what your partner typically does? Are these like freestanding, or are they hospital adjacent facilities and they have relationships with hospital networks, or is it a mix?

It's more the latter, but they are generally freestanding buildings. But many times, uh, most times probably, they're -- they're hooked up with, uh, hospital or affiliated with hospital networks, sometimes they're on their hospital -- or adjacent to their hospital campuses and sometimes they're in other locations.

And there are projects that are currently in the works, which is the basis of your -- of your 50 to $100 million target for next year?

Yes.

Okay. Any geographic focus, or is it just national?

It -- uh, it's -- really overlapping with our geographic locations in the mid-west, southeast, uh, they've done a little bit more up in, uh, some northeast areas.

Okay. Thank you.

And we have a question from the line of Greg Whyte from Morgan Stanley. Please go ahead.

Good afternoon, guys. A couple of things. Can you tell us what the same-store number NOI gross number was excluding lease term fees this quarter?

For the -- for the nine months, Greg?

For -- I mean if you have it for quarter and nine months, that would be great.

For the quarter without lease terminations it's about just around a half a percent of positive.

Okay.

And it's basically the same, uh, with -- with or without lease buyouts for the nine months, Greg.

And so then I think you said what was it zero to 1% expectation for the full year, is that correct, or was that just for fourth quarter.

For the year. For the full year.

And that's in or excluding term fees.

Including term fees for the year.

So are you excluding -- instead of a significant negative same-store in the fourth quarter without term fees?

No, Greg, we always look at them with termination fees. We've -- we've always done that. All of our same-store has it and then when we compare to the prior year, they're always in. So for the year we're looking at with termination fees, zero to 1% growth. And, uh, last year's termination fees will exceed this year's termination fees by probably $4 million, give or take.

Okay. Um, the -- there is still a fairly significant jump in your expectation for fourth quarter over third and recent quarters. Can you just give us a little color as to what the primary drivers of that acceleration are?

Uh, we've got a couple, um, held for sale properties, which we expect to close and recognize the gain on the sale of those properties here in the fourth quarter.

That's it, Dennie?

Uh, that's -- that's basically it.

Okay. You know, in terms of the acceleration in your development pipeline, uh, when I think about that and just appose it against what appears to have been a slight slowdown in moment momentum in the third quarter, can you comment on, uh -- on how you are feeling about, you know, having taken the development pipeline up more recently?

Well, a lot -- the development pipeline, uh, as you know, is -- is relatively pre-leased. We're 54% pre-leased in that development pipeline. So we feel pretty comfortable about that. We -- we have started a few speculative projects in, um -- in submarkets where we really feel very good. Uh, and one example is that speculative project. We were basically 100% leased and the market was 100% leased over in Groveport in Columbus, uh, there was signs of activity in the market, so we started the, um -- the spec building, we committed to it and started it in the early third quarter and then, um, in mid-September we finalized the lease to take about 75% of that building. So we're -- we're not very nervous about it, if that's your question, Greg.

Okay. And then just finally, um, on the -- I think it was the name -- (inaudible) the new program, the new development. Uh, the timing of the residential lot sales, can you -- can you give us any -- I mean, I think you said late '05, is that correct?

Yeah. We hope right now it's our anticipation that we will be able to start those residential lot sales in late 2005. But, again, what we've got right now is pretty much 1,700 acres of farmland. So we got a lot of work to do between now and then, but our anticipation would be that we could start those in, uh, late 2005 and again that's probably a 24 to 36-month cycle on disposing of those residential lots.

Okay. That's helpful. Thanks a lot, guys.

Thanks, Greg.

And we have a question from the line of Ross Nussbaum from Banc of America Securities. Please go ahead.

Hi, guys, it's Christy McElvry here with Ross. You gave a breakout earlier of the increase in operating expenses. Can you tell us how much of the sequential increase is one time versus on ongoing?

The -- uh, most of that increase would be really one-time, and we -- it was a -- either timing or it was because of last year there was some unusual items that -- that created -- that decreased the expenses last year and as a result year to year it was an increase for this year.

So in terms of a run rate, we should look more to the second quarter?

Uh, yes, for the most part, yeah, that's pretty good. You have to increase from the second quarter a little bit for the increase in assets.

Okay. And can you tell us what happened in Atlanta and Minneapolis on the occupancy side?

Bob, can you handle those?

Yeah, sorry. Um, well, in Atlanta on the office side, we added, as Dennie mentioned earlier, the Northwinds portfolio and Georgia 400 and that project was about 85% leased. But we're very bullish on that North Butlon market. It's had about a million square feet in net absorption year-to-date and, uh, so we see that increasing. And then in Minneapolis, I assume you're talking about the industrial side. We had three or four lease terminations up there, uh, but that market is increasing.

Great. Thanks.

And we have a question from the line of Paul Adernato from Max Core Financial. Please go ahead.

They've been answered.

Your line is open.

Hello, yes. My questions have been answered, thanks.

And we have a question from the line of Rich Sweigard from KeyBanc Capital Markets. Please go ahead.

Um, you started a couple of office developments this quarter in Atlanta, are you eyeing any other office developments, or is that just a couple of unique opportunities that you saw?

Um, that's pretty much a couple unique opportunities. We've got very little spec office development going on and really right now, unfortunately, very little build-to-suit on the office side going on right now.

Okay. Um, and then, uh, looking at the reduction on your top end of your guidance from last quarter to this quarter. What -- what caused you guys to bring that down ten cents?

Well -- oh. The -- ten -- ten cents -- well, let me just step back and give you our perspective. What we -- what we do, uh, which -- which some of you may not like but we feel it's the most prudent way for us to do this, is we give a pretty wide range at the beginning of the year, and we'll do that again in December. We gave it last December. And then, uh, as long as we're comfortable in that range, until we get later in the year we're gonna -- we're just gonna tell everybody that we're comfortable with that range and give you quarter-to-quarter guidance. So, again, if you look at it, we've really are -- uh, at the midpoint of the guidance we've provided, uh, at -- in December of last year. And one of the -- from our point of view, one of the key drivers is the fact that we're at the midpoint and not in the upper part of that guidance, is occupancy just hasn't picked up like we -- we thought it would this year when we were doing our original estimates a year ago. So we've -- we've ticked up slightly in occupancy this year but it's been relatively flat and a year ago we really hoped we'd -- we'd have better improvement on the occupancy.

All right. Thank you.

And we have a follow-up question from the line of Chris Haley from Wachovia. Please go ahead.

Dennie and Bob. On that occupancy comment. Uh, is there a -- is it a feel that the markets -- and if you want to break it down between office and industrial, that would be helpful. Is it the markets you are operating in are not expanding or absorbing more space, or is it Duke specific that maybe you felt that you could hold out for a little bit of rate or maybe move rate and not be as flexible on term? What -- why would you say it hasn't come in as -- as good as you would have would have expected?

Well, Chris, I think we just were hoping there'd be more of an economic recovery this year and we'd start seeing some pickup in overall occupancy, and that hasn't happened. I don't think it's isolated to our markets when you look at markets that we're not in I think across the country, uh, I don't think you've seen a lot of pickup in occupancy this year, although you -- you follow some of those other markets more closely than I do. That's my sense. And, um -- and again in our markets, um, we -- we typically outperform the market by 3% to 5% and I think that's still consistent, it's just that we just haven't seen that moment momentum, uh, across the board this year.

Yeah. Chris, I'd add to that. Atlanta is a perfect example where during the late '90s we were absorbing 14 to 15 million square feet of industrial space here. We were hoping we we'd be back to close to those levels this year, but year-to-date we're at about three to four million square feet of positive absorption, but it's not the 14 million it was.

Right. Okay. Uh, a question -- if you could help me out in terms of the -- either the overall portfolio or the '05 expirations. Where would you say your market-to-market is for your office -- suburban office and bulk?

Well, if you -- let's start with, um, office. Um, you know, if you look at our experience that we've had over the last two or three years, Chris, as leases have rolled -- you know, we always look at -- on it as a net effective rent, so the -- basically a straight-line rent over the life of the lease. We've only had one quarter where we actually had rent rolldowns. Uh , and, again, I think on a net effective rent basis, uh, on really -- across the product types, we don't have a lot of rolldown in -- in our leases.

On the comment about -- I asked earlier Matt about margins, I know you didn't have the exact numbers but for the third quarter. Most of the gains that you're including in your FFO are from your build-to-suit for sale program, that's correct?

That's -- That's the only one. We don't include any gains in our -- in our FFO from our held for rental property sale.

Right. If you had to give me a sent this year whether or not your margins on those sales have been better than last year, uh, what would you say?

I'd say --

Better or worse.

I'd say there's no question they've been better this year and I'd say there's no question that when we actually close the sales, they enter -- they were better than what we originally thought we'd get on the projects.

Okay. All right. I'm just trying -- I'm trying to reconcile obviously sequentially into the fourth quarter, uh, obviously -- I mean the pipeline activity. What was your -- final question. What was your full-year sales guidance?

Of, um, held for rental, is that what you mean? Or held for rental sales, Chris?

Well, I guess overall in terms of -- I think you provided us probably a build-to-suit per sale --

We were at about 160 to, uh, 240 million for both held for sale and held for rental and we're going to be right in that ballpark.

You're about 201 right now?

Yeah.

Okay. Great. All right. Thanks.

Thanks, Chris.

And our last question's from the line of Keith Mills from UBS. Please go ahead.

Yeah, a follow-up question for Matt. Matt, I'm not sure if you spoke about this on the call or not but I know the line of credit's about 350 to $400 million at this point, I think it's max is 500 million. Can you talk to us about your plans in terms of paying that down and what you might do with some more permanent debt?

Well, we will do what we -- Keith, what we've consistently done is use our line of credit for the portion of our capital structure that will be variable rate debt, and yeah, as it moves towards the -- the 400 million in the high end of the commitment, we will look to term that out and fill in our debt maturity openings that we have, whether that be at five or six years or ten years, it will -- or other -- other capital transactions, we'll just look to see what's most opportunistic at the market at that time.

Do you expect to do that Matt within the next five to six months.

We would have to with our development pipeline.

Okay. Thank you.

And we do have another question from the line of Scott Segleg from AG Edwards, please go ahead.

Hi. Sorry if I missed it, but can you comment on how -- your calculation of net effective rents?

Straight line NOI, Scott. Just think of NOI.

Okay. And do you guys include (inaudible) leasing costs in that?

No.

No? Okay. Thank you very much.

And if you wish to ask a question or make a comment, please press star one at this time. And there are no further questions at this time. Please continue.

Thank you Emmy and thanks everyone for joining our conference call today. Please have a good day.

Ladies and gentlemen, this conference will be available for replay after 8 p.m. tonight through Friday November 5th. You may access the AT&T conference replay system at any time by dialing 1-800-475-6701 and entering the access code 749611. International participants dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 749611. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.