Duke Realty Corp (DRE)
Q2 2012 Earnings Call
July 26, 2012 3:00 pm ET
Ron Hubbard – Investor Relations
Dennis D. Oklak – Chairman and Chief Executive Officer
Christie Kelly – Executive Vice President and Chief Financial Officer
Mark A. Denien – Chief Accounting Officer
Joshua Attie – Citigroup
Paul Adornato – BMO Capital Markets
James Feldman – Bank of America/ Merrill Lynch
Brendan Maiorana – Wells Fargo Securities
Ki Bin Kim – Macquarie Research
John Stewart – Green Street Advisors
Michael Bilerman – Citigroup
Jason Jones – Wells Fargo Securities
Ladies and gentlemen, thank you for standing by, and welcome to the Duke Realty Second Quarter Earnings Call. At this time, all phone participants are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) And as a reminder, this call is being recorded.
I'd now like to turn the conference over to Ron Hubbard, Vice President of Investor Relations for Duke Realty. Mr. Hubbard, please go ahead.
Thank you. Good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Denny Oklak, Chairman and Chief Executive Officer; Christie Kelly, Executive Vice President and Chief Financial Officer; and Mark Denien, Chief Accounting Officer.
Before we make our prepared remarks, let me remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you our December 31, 2011 10-K that we have on file with the SEC.
Now, for our prepared statement, I'll turn it over to Denny Oklak.
Dennis D. Oklak
Thank you, Ron. Good afternoon, everyone. Today, I will highlight some of our key accomplishments during the quarter in both our operational and asset strategies. Christie will then address our second quarter financial performance and progress on our capital strategy. Then, I'll finish up our prepared remarks with some comments about our outlook for the remainder of 2012.
By all accounts, the second quarter was a great success for Duke Realty and I'm very proud of our team for their accomplishments. We signed over 4.9 million square feet of leases in the second quarter and started development of $63 million of industrial projects and $65 million of medical office projects. All of our new development starts are 100% preleased with the exception of 431,000 square foot spec industrial start on our land in Chino, California. Our in-service occupancy percent increased slightly to 92.2%, while our overall portfolio occupancy was relatively flat at quarter end at 92.0%, really due to the speculative development start.
We made continued progress on our asset repositioning strategy with $103 million of acquisitions, comprised substantially of bulk industrial properties and disposed of $27 million of flex industrial, retail and land assets.
On the capital front, we issued $300 million of new unsecured debt at a company record low effective rate of 4.47%, lowering our cost of capital and reflecting an endorsement from the market on Duke Realty's improving credit strength. Christie will speak more in depth on our capital activities in just a moment.
From a macro perspective, halfway through the year, the economy is moving along at a relatively tepid 2% growth rate. Recent economic indicators have been mixed, with some of the manufacturing and freight data points slightly moving to the downside. Despite that, our overall leasing activity has held up well in both industrial and medical office.
On industrial, the trends in e-commerce and supply chain modernization are also continuing to drive steady demand for our newer, larger box modern industrial portfolio. The on-campus medical office facility business also remains robust, particularly on the new developments on. The suburban office sector continues to be sluggish in most markets with a few pockets showing good absorption and moderate rent growth.
Looking to the rest of the year, we expect continued slow, but upward growth, yet we remain mindful of rising uncertainty and event risk from government fiscal issues across the globe in the upcoming U.S. election.
As I said, we had another solid quarter of leasing activity with 4.9 million square feet of signings. We reduced 66% of our leases during the quarter. On the renewal leases, we attained over 2.7% and 5.3% increased rental rate growth in our industrial and medical office businesses, indicative of our ability to push rents in a high occupancy portfolio. Office continued to be a challenge with slightly negative growth as we expected.
With respect to same property performance, we achieved positive same property NOI growth for the 12 months and three months ended June 30 of 3.7% and 3.4% respectively.
Now let me touch on some of the key activity within each of our product types for the quarter. The national industrial market continues to improve with demand drivers positive on most fronts. Early indication show second quarter vacancy levels for higher quality product declined another 25 to 40 basis points to just under 9.5%.
With respect to select Duke markets, Chicago, Atlanta and Dallas, all reported 50 to 80 basis point reduction in overall vacancy levels, with new supply levels on a national basis still relatively muted at roughly a quarter of a percent of inventory. We continue to have strong fundamental outlook in the industrial sector.
With respect to leasing in our in-service portfolio, we completed over a 1.5 million square feet of new industrial leases and over 1.8 million square feet of renewal leases. Including new leases on development build-to-suits, our industrial leases totaled over 3.7 million square feet.
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