Oct 27, 2011
Executives
Ron Hubbard – VP, IR Denny Oklak – Chairman and CEO Christie Kelly – EVP and CFO
Analysts
Jamie Feldman – Bank of America Josh Attie – Citi Sloan Bohlen – Goldman Sachs Paul Adornato – BMO Capital Markets Brendan Maiorana – Wells Fargo John Stewart – Green Street Advisors Ross Nussbaum – UBS Dave Rodgers – RBC Capital Markets Ki Bin Kim – Macquarie Michael Bilerman – Citi
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Duke Realty Quarterly Earnings Conference Call. For the conference, all the participants are in a listen-only mode.
There will be an opportunity for your questions; instructions will be given at that time. (Operator Instructions) As a reminder, today’s call is being recorded.
With that being said, I’ll turn the conference now to Mr. Ron Hubbard.
Please go ahead, sir.
Ron Hubbard
Thank you, John. Good afternoon, everyone, and welcome to our third 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, Senior Vice President and Chief Accounting Officer. Before we make our prepared remarks, let remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations.
For more information about those risk factors, we would refer you to our December 31, 2010 10-K that we have on filed with the SEC. Now, for our prepared statement, I’ll turn it over to Denny Oklak.
Denny Oklak
Thank you, Ron. Good afternoon, everyone, we’re happy to have Ron on Board as VP of Investor Relations.
I think many of know Ron, but Ron has 12 years of experience in the REIT sector and then we look forward to introducing him to more of you at the upcoming NAREIT meeting in Dallas. Today, I will highlight some of our key accomplishments during the quarter, in both our asset and operational strategies.
Christie will then address our third quarter financial performance and progress on our capital strategy. We’ll then talk to more about our recently announced transaction.
We followed up on the positive momentum we generated in the second quarter with a very successful third quarter by all accounts. We continue to improve up on all of our key operating metrics and also made progress on our asset repositioning strategy through several industrial acquisitions and our first meaningful quarter of new development starts in a while.
All this positive momentum was obtained to mid continued uncertainty and mainly negative headlines from the headline News from macroeconomic prospective. Specifically, the housing market, financial services and banking sectors, and employment growth metrics continued to dominate the negative headlines.
Yet manufacturing output and manufacturing surveys continue to be relatively solid. With the majority of recent job growth focused in this sector, as well as wholesale trade and transportation, demand for Duke’s bulk distribution facilities continues to be good.
Fundamentals in our urban office portfolio appear to be stabilizing and medical office fundamentals continued to be strong. Development remains opportunistic with build of suites in office and industrial and relationship-driven starts in medical office.
Landlords are still not commenting much if any pricing power across all product types. Even with these challenging economic issues on international basis, I’m very pleased with the progress we made this quarter across our entire portfolio.
The total portfolio occupancy increased to 90.7%, which is our highest levels since 2000. We renewed 69% of our leases during the quarter and attend an overall rental rate growth on these renewals of 1%.
The new lease activity totaled 3.2 million square feet and when you couple this with a low level of terminations, we generate a positive net absorption of over 1. 6 million square feet.
While rent spreads are still challenging, it’s pleasing to see that we had a positive releasing spread across all product types. We also achieved positive same property net operating income growth for this 3 and 12 months ended September 30 of 1.2% and 2.1% respectively.
Once again, all product types produce positive results. Now, let me touch on some of the key activity within each product side for the quarter.
Industrial activity was strong across most of our markets. We completed over 1.9 million square feet of new industrial leases and approximately 1.9 million square feet of industrial renewals.
This leasing activity increased our overall industrial occupancy to 92.4% at September 30. Some of our larger deals included a 446,000 square feet lease in national to a major Internet retailer, to take that building to 100% occupancy, a167, 000 square feet at lease in Phoenix to cosmo power, filling up our value add acquisition from earlier this year and a 158,000 square foot 20-year lease in Dallas to Genuine Auto Parts.
In all, I’m very pleased to report that over half of our industrial markets have occupancy levels above 94%. I would point out that we have a few large fourth quarter lease expirations where the tenants have notified us they are not going to renew, so we anticipate some drop in our industrial occupancy level at year-end.
The office leasing environment continues to be challenging as expected. However, we were able to increase our office occupancy by over 50 basis points to 85.93% and achieved positive rent growth on renewals of 1.4%.
Some of our larger new office leases included in 82,000 square foot lease in Chicago to a major insurance company and 69,000 square foot leases in Atlanta to Rockton Company, square feet of leases in Indianapolis to Interactive Intelligence and a 46,000 square foot lease in South Florida to the University of Miami. On the medical office front, leasing activity and development opportunities continue to gain traction.
Our medical office portfolio increased by 150 basis points to 87.47% and us starter two new development projects, which I will cover in a minute. We also made good progress in our asset strategy during the quarter.
From an acquisition perspective, pricing on most deals that we have pursued has been aggressive as cap rates for high-quality industrial and medical office properties remain low. We have continued to stay true to our strategy and have remained patient, disciplined and selective with regard to acquisitions.
We focus on core stabilized bulk industrial and medical office properties for our acquisitions and intend to continue this strategy. We acquired $103 million of properties during the third quarter, almost all of which were Class A bulk industrial buildings.
These acquisitions included five industrial buildings in Raleigh, totaling 696,000 square feet that are 91.3% leased. Two industrial buildings in Chicago that are 100% leased, totaling 365,000 square feet and a 329,000 square foot building in Dallas, it is also 100% leased.
We also acquired two small office buildings, one of them was part of our Raleigh portfolio acquisition and the other is in Indianapolis property where we acquired our joint venture partner’s interest. Disposition activity was light during the quarter, but we are working on several smaller disposition transactions that we expect to close in the fourth quarter, as well as the significant office disposition we announced last week, which we’ll discuss in more detail later.
I’m pleased to announce some significant activity on the new development side. We signed a 15-year office build-to-suit transaction with Primerica on our legacy office park land in Atlanta.
This project kicks off our development in this park. On the medical office side, we started a project for health services is Indianapolis.
This project will be constructed and owned in a joint venture with the hospital that consists of a faculty office building on the campus of the new hospital being built. The hospital will occupy 100% of the building on a 30-year lease.
We also started one other metro office building in and off our three developments start totaled $162 million this quarter and there all 100% leased. On the industrial development side, more discussions are taking place for build-a-suits, yet there are still some hesitancies to comment on the part of the customers due to economic uncertainties.
So overall, the third quarter was an excellent quarter. I’ll now turn the call over to Christie to discuss our financial results for the quarter.
Christie Kelly
Thanks, Denny. Good afternoon, everyone.
As Denny mentioned, I would like to provide an update on our third quarter financial performance and progress on our capital strategy. Our third quarter 2011 core assets held was $0.29 per share, which is consistent with the second quarter.
Our earnings from rental operations increased slightly from the second quarter and large part due to continued lease successes, as well as due to the impact of the acquisitions. The increased earnings from rental operations were offset however by a decrease in income from our serviced operation due to substantial completion of the BRAC third-party construction project.
Although again I expect future projects of this magnitude of the BRAC project, we continue with a strong backlog of ongoing projects and expect our serviced operations to continue at above pre-BRAC historic levels, heading into 2012. For the quarter, our AFFO per share was $0.18, which translates into a payout ratio of 94% and our year-to-date payout ratio was below 88%.
AFFO per share declined slightly from the $0.22 per share reported last quarter and large part as the byproduct of capital expenditures necessary to support our successful leasing efforts that have driven the significant improvement in our occupancy. We utilized the majority of our cash on hand at June 30 to fund the 109 million redemption of our 7.25% percent series and preferred shares in July.
Primarily due to the scheduled repayment of $122.5 million of unsecured notes in August as well as over $103 million of acquisitions in September, we finished the quarter with $284 million balance on our line of credit. With regard to our capital strategy, all key metrics have improved throughout the year.
Specifically, our fixed charge covered ratio was 1.8 times, debt to EBITDA was 7.15 times and combined debt and preferred stock to EBITDA was 8.48 times ended September 30, 2011. I would like to point out that our combined debt and preferred stock to EBITDA of 8.48 this quarter increased from 8.18 times at June 30, 2011 primarily due to the timing of our acquisitions closing near the end of this quarter.
We are also in the process of extending our line of credit maturity date from February 2013 to December 2015. The total amount of our facility will remain at $850 million and will include $400 million.
I wanted to thank our bank for their strong support. Today we have the majority of the banks committed and plan to close by mid-November 2011.
We are pleased with our ability to continue to improve our balance sheet as our operating and asset repositioning successes play out. And with that, I’ll turn it back over to Denny.
Denny Oklak
Thanks, Christie. While there is still a tremendous amount of uncertainty in this economy, we’ve actually strengthened our portfolio and produced solid results in all phases of our corporate strategy year to date.
With a strong operating performance for the first nine months of the year and our expectations for the fourth quarter, we have narrowed our core FFO guidance to $1.13 to $1.15 per share for 2011. Now I’d like to discuss our significant office portfolio sales transaction.
Last Thursday we announced a definitive agreement to sell 82 suburban office properties to an affiliate of Blackstone for $1.08 billion. As noted, the transaction represents an accelerated over two years ago to reduce our exposure to suburban office properties primarily in the Midwest.
As you can imagine, a transaction of this size and number of assets can be quite complex, so we’ve been working on this deal for a while. The requirement to the buyer was that they acquired substantially all of our wholly owned office assets in each of the markets they entered.
We agreed to this provision and we’ll now only own joint venture properties in those markets after closing. And as far as pricing, our supplemental information released last night, we broke out the net operating income from these properties in the schedules on pages 17 and 18.
The core NOI from this properties for the nine months ended September 30 was $66.4 million, based on the sales price of $1.08 billion, this represents an annualized NOI cap rate of 8.2%. As you look at the third quarter core NOI annualized, the cape rate is 8.5%.
As you know, there are many ways to calculate a cap rate, but we believe looking at the actual core NOI from these properties for the nine months and three months period is an accurate representation of cap rates. Also keep in mind that these are NOI cap rates, and as you know, we always focus on AFFO our cash on cash cap rates, which are obviously lower.
I’d also like to point out that this portfolio is essentially unlevered with only $30 million of debt. In today’s world it is very difficult to put together a $1 billion portfolio of properties with no leverage.
This portfolio was very attractive because of the ability to finding in today’s market. So we are very pleased with this transaction and look forward to executing and closing in the next few weeks.
Now, Christie is going to discuss our intended use of the sales proceeds.
Christie Kelly
Looking forward, we intend to use the $1.50 billion for proceeds add follows. $284 million to pay down our September 2011 line of credit.
We also will repay $168 million of unsecured debt maturities coming due during the remainder of 2011. We also may redeem the $168 million, 6.95% Series M preferred shares.
We have about $250 million of net acquisitions activity we expect to close in the fourth quarter of 2011. That leaves about a $180 million of funds leased back to use for future acquisitions and allotment.
Bottom line, we intend to use about 45% of the proceeds, approximately $455 million from the announced sub-urban office portfolio disposition to further delever our balance sheet. 55% of the proceeds will be used to fund the growth of our industrial and medical office business.
It is our expectation that we will again have a zero balance on our line of credit by the end of 2011 and move into 2012 holding some cash under these assumptions, this transaction will be between $0.10 and $0.12 per share dilutive to core FFO for 2012. The effect on AFFO for 2012 will be between $0.02 and $0.03 dilutive.
Furthermore, we are committed to our strategy capital objective including achieving fixed-charge coverage above to debt-to-EBIDTA under 6 and combined debt and preferred stock-to-EBIDTA under 7.75. As you know, because of the uncertainty and volatility in the economy for the past few years, we’ve provided our annual earnings guidance in January.
Once again we plan on providing you 2012 earnings guidance and our range of estimates during our call in January. And with that, I turn it back over to Denny.
Denny Oklak
Thanks, Christie. In summary, we are very pleased with our operating results and our progress on our asset and capital strategies.
We believe the sale of the office portfolio is a win-win for both buyer and seller. We are able to move forward quickly on our asset repositioning and Blackstone is able to acquire a virtually unencumbered quality office portfolio and obtain favorable financing in today’s market.
So thank you again for joining us and with that, we will open it up for questions.
Operator
(Operator Instructions). And first from the line of Jamie Feldman with Bank of America.
Please go head.
Jamie Feldman – Bank of America
Thank you. I guess you could follow up on the Blackstone sale, talking about the processes doing a transaction, how deep is the pool of buyers and then kind of what was the marketing edge?
Ron Hubbard
Well, as you can imagine, we did not fully market this transaction, obviously if we’d have fully marketed this transaction, I’m sure you would first bought it much sooner but there was a pool of buyers. We did discuss the transaction with more than just one buyer and I think there was actually a number of people that were interested and we ended up working with the Blackstone folks.
Jamie Feldman – Bank of America
Okay. And then as you think about your remaining sub-urban office portfolio, how much of this improved the same-store trajectory of that portfolio, say over the next 12 months or so?
And also what’s the difference in the CapEx?
Ron Hubbard
Well, let me address the first part. I think it’s a little hard to say, looking out into the future how much it’s going to improve our same-store our performance.
I think obviously closed on this in the fourth quarter, those properties will be removed from our same property performance for the year, because we don’t own them anymore. So I think our same property performance looking at 2011 will look quite a bit better.
Looking at the remaining office portfolio going forward, if you look at our same property performance as we said this quarter, we were slightly positive. And I would tell you, right now.
I don’t really have any reason to believe that’s going to change over the next 12 months, probably sort of flat to may be slightly positive on the same-store, but obviously again in January of next year we’ll give you our guidance for that – for 2012. And then I’m not sure I quite understood your last question Jamie, on the capital expenditures.
Could you say that again?
Jamie Feldman – Bank of America
I’m just thinking in terms of – I mean, Christie has said the AFFO impact versus the FFO impact. So how much are you saving in CapEx by not having the portfolio?
I assuming it’s greater than average CapEx per square foot?
Denny Oklak
Well, it is because the office product is always greater than average on CapEx per square foot then our overall portfolio. So the answer to that is yes.
Jamie Feldman – Bank of America
Okay. We can talk about that later.
Thanks.
Operator
Our next question is from Michael Bilerman with Citi. Please go ahead.
Josh Attie – Citi
Hi, thanks. It’s Josh Attie with Michael.
Can you help us understand some of the differences between the assets that you sold to block, some of the assets that you are keeping. Looking at the supplemental, it looks like the NOI per square foot is clearly lower at the Blackstone portfolio.
But the rental revenue per square foot looks like it’s similar and I don’t know if that’s a function of the leases being structured differently or then having different cost structures. But can you kind of help us understand maybe what the differences are?
Denny Oklak
Yeah, I don’t know, Josh, that I can actually specifically answer those questions. I think we can look into that.
But just in general, again this was really the markets that we sold, four of them in the Midwest, guess work, and then the rest in the Southeast. What we really have left is a couple – really three Midwest markets with our office being Indianapolis, Cincinnati and St.
Louis. We have office assets in South Florida, it’s a big concentration of office assets for us, a little bit in Nashville and then in Washington DC in our joint-venture with (inaudible).
And so I guess just a couple of things I will say sort of any. When you look at the gross rent rates in those remaining markets, particularly Washington DC is the highest and quite of bit higher, probably 30% higher than our – most of our other markets.
And again when we show our leasing statistics in our supplemental, we include the joint ventures at 100% on the individual statistics. Obviously not in FFO, but as a statistic.
So the leasing activity in DC is going to obviously move those numbers higher. And then I would also say that St.
Louis is also one of our higher growth rent markets, when you look across the country, our gross rents in St. Louis are $24 to $26 range, so that’s higher than a number of the other Midwest markets.
So – and then of course South Florida is a little bit on the high side. Because a majority of our markets are going have higher gross rental rates and then – but still – the concentration of those assets is going to be still probably tilted a little bit towards the Midwest for Cincinnati and St.
Louis. Hopefully that helps.
Josh Attie – Citi
Okay. Thank you.
That helps.
Denny Oklak
Okay. Good.
Operator
Next we’ll go to Sloan Bohlen with Goldman Sachs. Please go ahead.
Sloan Bohlen – Goldman Sachs
Hi, good afternoon. Just a question on guidance number that $0.10 to 0$.12 dilutive for next year.
Can you maybe dig in a little bit about what is assumed about the pace or yield in which the procedure are reinvested? And then additionally to that, whether or not there is any G&A savings from shutting down operations in certain of these markets?
Denny Oklak
Well, let me start and then Christie can join me in. But I will tell you that the guidance, Christie went through the complete list of the use of proceeds.
So for example, the preferred or the debt is just going to be what the interest rate in on that. And then the acquisitions that we have planned for the fourth quarter is roughly – I would say roughly at 7% kind of cap rate range that we would be using on that to redeploy.
And then again, we’ve got basically, I think I said about – she said about $180 million write off of proceeds that are specifically identified anywhere right now and we’re just kind of assuming that that would be spread out during the first part of next year again at above that 7% cap rate and redeployed.
Sloan Bohlen – Goldman Sachs
And on just those initial acquisitions, are you expecting to get that yield day one or are you looking at lease up opportunities in I guess –
Denny Oklak
We’re really not – we are expecting those day one because as I mentioned a remarks, really our acquisition strategy is going to be it has been to focus on core stabilized bulk industrial and medical office assets.
Christie Kelly
Yeah, that’s right, Denny. So I would say, just in summary, as you can see, good majority of the $1.05 is going to be deployed immediately, call it 85% to 90%.
Sloan Bohlen – Goldman Sachs
Okay. And then just on the G&A sided, is that anything to say there?
Denny Oklak
Well, I don’t think so. I think what we will be reducing our overall overhead cost obviously, because people that are directly associated with these properties, we won’t have any more.
In the Blackstone, may hire some of those or other service providers to those properties may hire some of those folks. So our overall overhead cost will drop, but I think when you sort through and what actually ends up in G&A, we don’t anticipate any drop in that.
Sloan Bohlen – Goldman Sachs
Okay. Thank you, guys,
Christie Kelly
Thanks, Brendan.
Operator
Our next question is from Paul Adornato with BMO Capital Markets. Please go ahead.
Paul Adornato – BMO Capital Markets
Thanks. Switching to development, I was wondering if you could talk about your plan, your development hurdles or your return hurdles and pre-leasing requirements before you start developments.
Denny Oklak
Sure, Paul. I think as you know, there isn’t a whole lot of development going on and I could also say, as you know, we’re really not starting any kind of speculator projects today.
So as I said in the remarks, all of our new development, which is over $160 million in the third quarter were 100% lease in really long-term leases. Just to give you an idea on those projects, the going in cap rate that are yield on those properties within 7 to 7.25 range.
But again those are long-term leases with annual rent bumps built into those and all those. So obviously the average yield on those significantly higher than that.
And then, the only thing that we’re starting with any vacancy at all today are few medical office property, which is typical, but we’ve actually pushed our pre-leasing requirements on those. We use to be more on the 50% range, now we’re pushing that up to 70% to 80% pre-lease for the medical office properties and that’s been pretty consistent here.
The yields on the medical office properties today are those kind of properties are starting in the sort of high 7s, low 8s, and again moving up from there. And it’s really hard to say anything on industrial building because we haven’t really started anything and we’re not intended to starting expect here in the near-term future.
Paul Adornato – BMO Capital Markets
And would you anticipate spending anything on land that it is rebuilding a land bank of any sort?
Denny Oklak
No, not really. But I will say we run into a couple portfolios where we’re buying some industrial buildings we like that may come with a site or two.
And so we would do that, but we’re not going out and buying any undeveloped land on a separate basis and we’re really working hard to continue to sell some of that land and reduce that investment on those parts, for future sale.
Christie Kelly
And I would echo Denny’s comments, Paul. We’ve been very selective on the acquisition front.
And one of the key things that we look at is the land component.
Denny Oklak
But there is – I think only one acquisition that we have done so far had land with it at all.
Christie Kelly
Pretty material.
Paul Adornato – BMO Capital Markets
Right, okay. Thank you.
Denny Oklak
Thanks, Paul.
Christie Kelly
Thanks Paul.
Operator
And next we’ll go to Brendan Maiorana with Wells Fargo. Please go ahead.
Brendan Maiorana – Wells Fargo
Thanks, good afternoon. Question I guess just a follow-up with the acquisition strategy.
Denny, looking at stabilized Class A industrial, it sounds like that’s an asset class that’s going to be pretty competitive when you’re trying to get these acquisitions done. So what do you think is the comparative advantage that’s allowing you guys to win some of the deals that you’ve done versus the competition that’s out there that imaging is pretty steep looking at these assets?
Denny Oklak
Well, I think there is a couple of things, Brandan. And one, we have brought – have been able to buy a few things off market, where before we actually started getting marketed, we were able to get in there and we really get those opportunities just by doing so integrated into our local markets.
And we have done a handful of those this year. On the other ones when it is comparative bid, it is a little bit more difficult for us, but we do have an advantage in many respective because of the folks that we know – obviously know the investment sales brokers very well and all these transactions were handled by investment sales brokers.
And they have a lot of confidence in us. So they know that if we’re in there and we’re going to close, we’re going to stick to the agreements we made because we do that and everybody knows that.
So many times, if it’s a very close race, we can win out just because of their confidence in our ability to execute and close.
Brendan Maiorana – Wells Fargo
Okay, that’s helpful. In terms of the portfolio targets that you guys now have after that $1.1 billion of sub-urban office closings and I know you’ve got.
What else is out there that you want to line up on the sub-urban office side? I guess you’ve got Cleveland out there, but you’ve talked about, are there other markets you’d like to discuss on as well?
Denny Oklak
Yeah. Let me just first say where we’re projected be kind of a yearend now, assuming this transaction does close and a few other things that we mentioned we’re going to process.
We would actually be at about 54% industrial, 32% office, 10% medical office and the 4% retail. So we really only got about 6% more overall repositioning to do on the industrial side.
So really switching and we’re going to keep our strategy the same, new development build-to-suits and just core bulk industrial. And then on the office we’re at about 32% and our target is 25%.
So we’ve made obviously a major move with this transaction. We actually did close on the sale of three additional office buildings in Cleveland in October in the fourth quarter, so those are part of that.
I think now we’ll be obviously I think more selective on our office disposition and we’ll really try to look at some of the, I will call, less functional older sub-urban office buildings and move those and then that 25% will really be comprised of the very core, very solid office buildings, mostly that will be in the major markets like, such as Washington, Raleigh, South Florida. We have a little bit in the Midwest still, in Indianapolis, in Cincinnati and St.
Louis. I’m sure we’ll have some of those properties left, but there will be mostly core properties in those other markets.
And then again where we still have development pipeline on the MOB side and also have looked at and I think we’ll close some MOB acquisitions and then ultimately when the timing is right, we’ll just dispose into retail and redeploy that. But the new I think really is this is a manager step in getting there to our targets much more quickly than the time like we laid out.
Brendan Maiorana – Wells Fargo
Yeah, yeah, absolutely. And then just lastly, there’s been a lot of discussion obviously over the past week about the pricing of the transaction say on the Blackstone.
Can you kind of clear up what you think the replacement cost of these assets is and how that compares to the $107 a foot for these 15-year-old asset?
Denny Oklak
Sure, I’ll try. Of course it’s little hard to peg an exact replacement cost.
And I guess first of all one comment I’d make, I’ve never closed a transaction what buyer and seller have ever agreed on what the cap rate was. So that is not unusual.
I think the best way we can show is the way we did show, in our supplemental package, I mean for you guys that’s the actual NOI that was included and obviously when we close, we will be required to pro forma financial statements, basically indicating the effect of this transactions. So you guys be able to look at those posts-closing also, but it will really reflect what we’ve shown in the supplemental package.
So on the replacement cost per square foot, it’s really kind of all over the board. When you think about 82 buildings in I think seven different markets here, it’s all over the board.
But I would say where you look at the bulk of these assets are, the replacement cost is probably in the $120 to $130 range, something like that for new office building today. But I think I’m not sure that’s all – the whole thing is relevant.
I think certainly that’s partially rolled. But also the basis that we sold that at $107 a food is only about 84% leased.
So to get that lease more, the basis is going to go up in those properties to prove those up to a more stabilized occupancy, as the economy of improves, which is what I assume is Blackstone’s intend with those. So it’s not just 107, there is going to be additional capital cost in there.
And then I think again it will vary market by market, but $120 to $130 or $135 is probably a pretty good number.
Brendan Maiorana – Wells Fargo
That’s great color, I appreciate. And thank you, guys for this disclosure in the supplemental on the NOI as well.
Denny Oklak
Thanks, Brendan.
Christie Kelly
You’re welcome, Brendon.
Operator
And we’ll go to John Stewart with Green Street Advisors. Please go ahead.
John Stewart – Green Street Advisors
Thank you. Denny, can give us the a rough break down in terms of the $250 million of acquisitions in the fourth quarter, between bulk industrial and medical office?
Denny Oklak
Yeah, I think that that will be probably actually I think in the fourth quarter is probably be about 50-50 between industrial acquisition and medical office acquisitions, we’ve actually found some very good medical office acquisitions and working with some of the hospital systems and some new hospital systems that where we believe we’ll close in the fourth quarter. We’ve already closed some industrial acquisitions during the quarter.
So I think on a net-net basis, certainly roughly half and half.
John Stewart – Green Street Advisors
And have about from a market mix prospective?
Denny Oklak
Kind of all over. We did close, I think it’s been reported.
We closed out a portfolio of industrial that was about $100 million and we closed that in October. And that was mostly in Chicago, there was own building in California and nine buildings in Chicago.
And then we’ve got couple of buildings in Dallas, medical office properties are actually mostly in Texas. And so it’s pretty geographically diversified, but it’s really in our target markets, John.
John Stewart – Green Street Advisors
That’s helpful. Thank you.
And I think you also referenced on occupancy due to some in the fourth quarter. Can you give us some color there and how big of a dip are you expecting?
Denny Oklak
Well, I think the color is, it’s just a couple, we have on large lease in Atlanta with a tenant that we now is going to move out and that’s about 700,000 square feet. And then we’ve got some other ones that I would classify that we think are going to leaves that are more on the short-term basis, some in 250,000 square foot here in and 350 there.
So when we look at the dip, it just really depends on how the leasing activity is in the fourth quarter. And just I would compare this back to the second quarter this year almost, John.
We told everybody, we have some leases expiring in the second quarter and we anticipated our occupancy to go down. But leasing activity turned out to be terrific and we actually increased our overall occupancy in the second quarter.
So I can’t say and that we think that’s going to happen again in the fourth quarter, but it would probably be in the – at the top end probably in the 100 basis points range at the most of a drop. And again if leasing activity is reasonable in the fourth quarter, it will probably less than that.
John Stewart – Green Street Advisors
Sure, understood. And would it be possible to get the cash mark-to-market on the releasing spreads during the quarter?
Denny Oklak
That’s we disclosed in the supplemental, John, we don’t ever really calculate, we always to net effective rent, because for us we just think that’s the better indicator because we got all the pre-rent periods and may be the lease that was expiring and the new lease. So we have always thought that that was a better indicator and that’s what we disclose in the sub manual package.
John Stewart – Green Street Advisors
Okay. And then just lastly, I’m curious, if you’ve gone an IRR in terms of your hold on the office portfolio that was sold to Blackstone?
Denny Oklak
No. Some of those pre0day meet, John.
John Stewart – Green Street Advisors
Okay.
Denny Oklak
(Inaudible). So we really didn’t do that.
Lot of that stuff, I would say probably most of the Columbus stuff was developed before we went public or a lot of it. So it’s kind of hard to track going back or back.
John Stewart – Green Street Advisors
Sure. Okay, thank you.
Denny Oklak
Thanks, John.
Operator
And next we’ll go to Ross Nussbaum with UBS. Please go ahead.
Ross Nussbaum – UBS
Hi, everyone. Good afternoon.
Christie Kelly
Hi, Ross.
Ross Nussbaum – UBS
Can I dig into the election of portfolio a little more? How does the process work?
Did they approach you or did you go to them?
Denny Oklak
Well I would say, I don’t know quite how, quite hard to answer that. We just ended up talking to each other, let me put it that way I think.
So –
Ross Nussbaum – UBS
How was the portfolio of cities selected? Did they say, hey, this is what we want or did you sort of say, hey, take a look at everything we got, tell us what you want.
Denny Oklak
Well, I think it was a negotiated process. It was – there was a lot of different discussions going on and it had to do with what cities they want, what cities we want to what city that may sense for us.
One of the things I mentioned in the remarks was one of their requirements in understandably so was they didn’t want us to cherry-pick a particular market. So they wanted to own all of our assets in that market, which makes perfect sense.
And so we had – and then also one of the driving factors for us was what the use of our proceeds. As you see, we size this pretty much where I think its ideal for us because we can virtually redeploy the proceeds, as Christie said, 80% to 85% immediately.
Meet some are helped on our leveraged metrics by the way and then do some of the acquisition and repositioning that we’re working on. So I think lot of it also had to do with the overall size of the portfolio in mixing and matching markets.
Ross Nussbaum – UBS
I guess I’m wondering if I looked out over the next well the 36 months, I do know what timeframe. Clearly Blackstone’s objective, they’re not a long-term holder, right?
So they want to try to maximize their IRR over some three, four, five-year hold. So I’m wondering what they saw in these assets as a buyer versus what you saw in your willingness to let these assets go versus others?
Denny Oklak
Well, that’s an it’s an excellent question. And I think you ought to ask that question to Blackstone, because I don’t think I can speak for them.
Ross Nussbaum – UBS
So I would surmise that you were more comfortable with the permits that the assets that you’re left with perhaps in your mind are better positioned for the future than then ones you’ve sold?
Denny Oklak
Well, I think I don’t know if I would say that specifically. The couple things we have said as we have gone through this repositioning process is, we really wanted to get to that asset mix, our 60, 25, 15 and we’re sticking to that.
And then we want to be in – there are certain market we definitely want to be in, places like Washington DC, Raleigh, South Florida, and you noticed we do not sell any assets in those markets. And then the rest of it is just short of the negotiation process of what works.
It’s not that easy to go out and do $1 billion-dollar transactions, because it’s just – it’s difficult. By the way, I said it’s pretty hard for a buyer to find and unleverage billion-dollars portfolio out there today.
And then it’s also not really easy for us find a lot of billion-dollars buyers out there. So if you want to do a transaction like this, you kind of do some give-and-take and make sure just ultimately make sense for you.
And I think this will make perfect sense for us in light of all those strategy and everything we’ve outlined.
Ross Nussbaum – UBS
Okay. And then Christie lastly, on the preferred that you’re potentially going to be redeeming here.
Help me understand the thinking there, because I sort of think that a sub-7% coupon on a press, isn’t all that bad. And when I look out I think 2013, you’ve got a preferred with an 8 candle on it that’s redeemable.
So why not save the capital to take that one out and this one in place?
Christie Kelly
Ross, I think that’s a great point. But it is as you look at our overall capital strategy, one the objectives that we had set out in achieving was to reduce our overall preferred as it relates to our total capital stat, and get that to about $500 million.
So with that I had my eye on the redeemable not preferred, which we’re already took down in July, and the end as well, offers in nice alternative to help us get to our overall capital objective together with the house in 2013. So it does provide a good alternative for us and get us to our debt less preferred to under 775.
Ross Nussbaum – UBS
Okay. Thank you.
Operator
And next question from Dave Rodgers with RBC Capital Markets. Please go ahead.
Dave Rodgers – RBC Capital Markets
Christie talking about governors that you mentioned earlier I guess, in terms of the press dividend coverage or fix coverage. You looked continue to accelerate the program like you done here or will just the drag down little a more now, and so you feel little bit better leasing on that front?
Christie Kelly
From the leasing prospective, leasing is one of the primary drivers of the improvement on our fixed charge. And then the compliments if you will or the reduction in our overall preferred.
So we’ll continue on the task and you know be prudent, but as Denny had mentioned and as I given in the overall use of proceeds that if really does provide us to means to accelerate the execution of our asset in capital strategies, hence we’ve communicated and as well, with that achieve our deleveraging in this objective.
Dave Rodgers – RBC Capital Markets
I guess further the question, we’ll continue to see the same type of acceleration or is that more dependent on fundamental?
Denny Oklak
Well, I think, there is two pieces to it David, and one is the repositioning and then what floor we decide to use repositioning proceeds to change balance sheet and that one, I think it short up in air, just stands on what transaction to happen and then the other thing as Christie said on the coverage ratio, that will accelerate as quickly as we get our vacant space lease out. So I think that’s really, yeah, and I think those are, both of little hard to predict on that, that quite sure exactly was what do you want say about that, but that’s the way we look added.
Dave Rodgers – RBC Capital Markets
Okay. Fair enough, and I think with regards to the Blackstone portfolio sales, did you have any often going position or were they any land position that were on the table with that part of the deal?
Denny Oklak
We do, we have some land in the most those markets, not all of them, of the total land position our investment is $80 million to $90 million in those markets. And we have the ability to go ahead and continue to develop on that land or whatever we decide to do with it.
Dave Rodgers – RBC Capital Markets
Thank you.
Denny Oklak
Thanks.
Operator
And we’ll have the line of Ki Bin Kim from Macquarie. Please cooperate.
Ki Bin Kim – Macquarie
Thank you. I just want to ask a couple more questions on the Blackstone deal.
I guess first of all, how important was it in terms of what kind of actually it take that assets were encumbered.
Denny Oklak
Well, I think probably Ki Bin, I think this is really an organic question for Blackstone, Ki Bin, but I’ll give you my thoughts. I think they were very interested when they talk to us that they could get such a large unencumbered portfolio, because as I said, it’s hard to do.
And just looking out there today, everybody knows what today’s interest rate, it’s pretty, you can get some pretty favorable financing. So I’m assuming it was fairly important to them, but they have two really speak to that.
Ki Bin Kim – Macquarie
And are the remaining assets unencumbered as low or the what do you have left (inaudible)?.
Denny Oklak
It’s a combination of both. We use mostly unsecured debt, we’ve got some secured debt, but it’s not huge percentage of our overall debt still even after we get all done with this transaction.
And again most of that debt has come from assets we’ve acquired and they’ve had debt on them and we have assumed them. And then as we move down the road, we generally retired that debt and move it into the unsecured or equity piece.
Ki Bin Kim – Macquarie
Okay. So it’s actually a different way.
Your remaining sub-urban office portfolio on that to undepreciated book value, what that percentage look like of finance – of secured debt, I should say.
Denny Oklak
I don’t think we have it in total, I don’t think we have it broken now by office. And I think in total it’s in the supplemental package right now.
(Inaudible).
Christie Kelly
That’s 70-30.
Denny Oklak
Encumbered. So we just don’t have that in front of us broken out to REIT office and industrial.
But I guess what I would say is just sitting here thinking about – most of our office assets are still going to be unencumbered.
Christie Kelly
That’s correct.
Ki Bin Kim – Macquarie
Okay.
Christie Kelly
And from that perspective to Ki Bin, as you can imagine in getting the line approval, as well as in discussions with the rating agencies, the quality are remaining unencumbered pool, as we did in ‘09 and as we do today. We’re very aware of and at least make sure to keep the integrity of that overall pool, and as well make sure that we have plenty of room on our covenant.
Ki Bin Kim – Macquarie
Okay. And just a couple more question on it.
In total fund, qualitative effects or I mean effect of take a looking at agent credit quality from you saw versus what you’ve kept, how would that compared within the two portfolio?
Denny Oklak
I don’t think, there is going to be much different, for the most part, Moltai Tennessee office buildings all around and engage there a little the remaining portfolio is a little bit newer in this. So I don’t think there is any change in our Tennessee quality mix.
Ki Bin Kim – Macquarie
And I guess one part the reason, I would say because the MOI margins for you were saw regular you keeping seem very different? I want to indicate some pricing color on that?
Denny Oklak
Well again you know every market is different, and you know some markets have higher expenses related to the net rather gross, we are lookout it some of them have lower – so I think it’s just really a combination of lot of factors and it doesn’t necessarily mean anything specific. Have you can see from our subliminal package the way we broke up the NOI and the how much NOI is going to be related to our remaining portfolio and how much we defeat that is so.
Again in that, this kind of office portfolio we it can very pretty greatly on a NOI (inaudible) based on cities and a lot of different things.
Ki Bin Kim – Macquarie
Yeah, am I referring to the margins. The margin differential specifically?
And is that maybe because of what will you keeping is more vertical on versus more they sold few that be with a current payment?
Denny Oklak
You know, I don’t – probably of valid question (inaudible) think we can answer that, right now, I don’t have any answer for that.
Ki Bin Kim – Macquarie
Okay.
Denny Oklak
Will look it that.
Ki Bin Kim – Macquarie
And then kind of last quick question on your development yields, how you quote is that free right down of land or?
Denny Oklak
Well, on the developed land we did it right any down. As you recall a couple of years ago when we looked at our land portfolio we took about of third of it.
And identified it for sale and we didn’t take any payment charge on that land and we were working our way through this closing of that land. Just way the accounting rules work on the development land, there – you just (inaudible) ever get into the payment charge so all the development yields at our basically on a period basis.
Ki Bin Kim – Macquarie
Okay, thank you guys.
Christie Kelly
Thanks, Stephen.
Operator
And we’ll go back to Michael Bilerman with Citi. Please go ahead.
Michael Bilerman – Citi
Yes. Denny, I wonder how many of these assets came from Weeks merger?
It was a joke, it was joke.
Denny Oklak
Always, I will give you the exact number, I would say few, a few.
Michael Bilerman – Citi
Maybe just turning to the medical office portfolio for a second. With everything is going on in healthcare, have do you sort of feel about that piece of the portfolio, obviously you’re seeing the strong growth as the straight line runs and burnt off in the developments.
So where do you sort of stand and what’s the market environment like?
Denny Oklak
Well, we feel very good about that piece of the business. And I would say, the marketing environment is still good.
I think just like other areas of the economy, there is plenty of uncertainty in the healthcare business now. One of the trends that we’ve mentioned I think that everybody before that we’re seeing is the acquisition of physician practices by up hospital healthcare systems, that’s still going on and I think that has the tendency to slow down some decisions, because what happens is, a hospital may won an on-campus medical office building.
And as you know, most of what we do is on-campus. And they want to take some, but they also want to bring in some doctors, so part of process to negotiate in the medical office building is which physician practices are they going to acquire and putt in that building.
So it just takes a little bit longer to work through some of those things today than may be did a while back. So I think that’s one trend we’re seeing.
But I think overall, business is very solid, we continue to see development opportunities as we pointed out. We started several projects this year and have more in the pipeline.
So we’re pleased and that’s still going to be a great piece of our business as we go forward. As I mentioned, after this transaction, it will be about 10% of our overall assets that we wanted keep continue to grow that, after the 15% range.
Michael Bilerman – Citi
And then where do you think just overall on development, the pipeline today is $125 million with it’s about $60 million left the fund, and you obviously delivered some projects already this year. Where do you sort of see the pipeline overall across each of the sectors you’re operating in running over the next 12 months?
Denny Oklak
Well, so far the primary piece of the development pipeline has been medical office and over the last probably 18 months that is by far the majority of what we have and including even this quarter. But for we didn’t, as we mentioned we signed the deal to starts a build-to-suit a headquarters building for primary get down in Atlanta, which is pretty significant project at 60 some million and, I think the build-to-suit projects today are probably going to be sort of few and far between, there may be one here, there are like that.
But I do think, the both industrial Mike sense is, it’s going to pick up a little bit, getting into 2012 on the built-to-suit I think. There are seems to be a little bit more discussion and activity on the built-to-suit out there now.
But I would say in 2012, I would still say the majority of our starts, who going to be on the medical office side.
Michael Bilerman – Citi
And then stuff – that came in the first and second quarter, where do those yield stand today versus when you sort of reach stabilization session that going to be additive FFO over the next 12 to 24 months.
Denny Oklak
Are you talking about acquisitions or development?
Michael Bilerman – Citi
At the development, I mean most of offices fully leased I still know if there is going to be a big gap impact. So looking at the page 29 of the supplemental.
Denny Oklak
I don’t think any of those projects individually are going to have a real significant impact Michael, obviously when there are 100% leased that reasonably good yields here, and even in today’s market, are there going to have a positive impact dollars when they do come in to service so.
Michael Bilerman – Citi
My last question just in terms of, I will ask one on the Blackstone portfolio, when and do appreciate the information on page 17. I assuming you look at the annualized third quarter NOI versus the annualized nine months NOI, you obviously get a different perspective given in the NOI in the third quarter was a lot higher than the annualized income for the first nine months.
So here eight and half cash yield with 3Q results are $91 million of that NOI in Europe sort of it, 815 yield on nine months annualized or $88 million to NOI. So it’s anything particular going on in the portfolio in the third quarter are in the nine months, that what skew that one were in the other?
Denny Oklak
Well, the answer is no, not really, we either look at the occupancy for the average occupancy for the nine months versus 13 months and its pretty close. My only comment there would be is I think we have always cautioned everybody about looking at quarterly information and we have said that about same-store growth many time because just things can happen in a three months periods, that push things up or down.
And it might been in the longer that periods of look at the better view we get, Now that doesn’t mean I’m saying it the lower cap rate I’m just saying that, look we put the numbers out there up in front of you. So this is just a representative cap rate of what the transaction is.
And again as I said, there is a lot of different way to count. And so I think just gets everybody in the ballpark.
Michael Bilerman – Citi
Well, I guess when you look at is the – your remaining sub-urban office portfolio itself a different story, right. So you look at the Blackstone portfolio, the third quarter annualized NOI is up 4% relative to the nine months annualized where there is a stuff that you cap is down 2%.
So did there something going on between the two pieces? So I don’t know, maybe it’s better to think about exemplary of budgets and all the properties, thinking about it on a 12 months forward basis, if you had NOI forecast for the entire sub-urban office portfolio.
What would the NOI be under that scenario so that we can start honing in as too really what the cap rate of the portfolio is? What’s happening with it?
It was strange to see the Blackstone peace go up 4% on an annualized basis and the rest of the stuff you have got down 2%, which then just somewhat called into question, whether there was something happening in the third quarter, with either in the stuff that’s on your books or the stuff that you’re selling?
Denny Oklak
Again, I just – two things I would say. One, I would caution you as you look at quarterly information because there can just be a lot of different things in the quarterly information that causes SKU, because you’ve got, you could have at least exploration, you could have at least burning off, kicking in during the quarter maybe one month end the quarter or half of month at the end of the quarter.
So those kind of things can affect it. And the other thing I wish to add although is we had good leasing activity in that particular portfolio in the third quarter, sort of late second but throughout the third.
Quarters. So those several bigger deals, I mentioned some of those bigger office deals on – in the prepared remarks and you know several those we are in that portfolio.
So we did have some pretty good leasing activity in that portfolio. But again if I look at it, I don’t think there is anything specific that I point out other than maybe that they had pretty strong leasing activity there.
Michael Bilerman – Citi
I said if there was a tax refund or – maybe there is something one time in the third quarter result from that portfolio, just make the pricing but better. So I was just trying to see if there anything else that was within there?
Denny Oklak
Well, I don’t think there’s anything we’re really aware of as of today, Michael. As I mentioned, once we close this transaction, we’ll have to do a little bit more of role up reporting on it.
So – but definitely as we look through there, something comes to our attention, we’ll certainly let everybody know.
Michael Bilerman – Citi
Great. Thank you much.
Denny Oklak
Thanks, Michael.
Operator
And with no further questions, I’ll turn it back to presenters for any closing comments.
Denny Oklak
Okay. Thank you very much.
Everyone. And we hope to see you all in a couple of weeks out at NAREIT.
And then we look forward to talk to you again in January. Thank you.
Operator
Ladies and gentlemen, that does concludes your conference for today. Thank you for your participation.
You may now disconnect.