Ron Hubbard - Vice President, IR Denny Oklak - Chairman and CEO Jim Connor - Chief Operating Officer Mark Denien - Chief Financial Officer.

Jamie Feldman - Bank of America - Merrill Lynch Vance Edelson - Morgan Stanley Kevin Baron - Citi Brendan Maiorana - Wells Fargo Securities Eric Frankel - Green Street Advisors Dave Rodgers - Robert W. Baird Ki Bin Kim - SunTrust Robinson Humphrey Michael Salinsky - RBC Capital Markets Jamie Feldman - Bank of America.

Ladies and gentlemen, thank you for your patience 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. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President, Investor Relations, Mr. Ron Hubbard. Please go ahead..

Thank you, Mala. Good afternoon, everyone and welcome to our third quarter earnings call. Joining me today are Denny Oklak, Chairman and CEO; Jim Connor, Chief Operating Officer; and Mark Denien, Chief Financial Officer.

Before we make our prepared remarks, let me remind you that statements we make today are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. For more information about those risk factors, we would refer you to our December 31, 2013 10-K that we have on file with the SEC.

Now for prepared statement, I’ll turn it over to Denny Oklak..

Thank you Ron, good afternoon everyone. Today I will highlight some of our key accomplishments for the quarter and then Jim Connor will give you an update on our leasing and development activity. I’ll review our asset recycling transactions and Mark will then address our third quarter financial performance and balance sheet.

I have to say that the third quarter of 2014 was one of Duke Realty’s best quarters ever. Our operating fundamentals were at near record levels. We placed in service over 3.6 million square feet of new developments which were 98% leased and have an 8.6% GAAP yield.

We continued our asset recycling by selling a $175 million of mostly suburban office assets at a 6.2% in place cap rate creating significant value for the company.

I’m very proud of the teams we have in place throughout organization and their ability to execute the real estate transactions and operations as well as or better than anyone in the business. Specifically, we signed 5.9 million square feet of leases and finished the quarter at 95.4% in service occupancy rate, our highest level since 1995.

Rent on renewal leases for the quarter accelerated to 9%, up from the 7.5% to 8% level of the first two quarters. This performance reflects tightening fundamentals and the quality of our modern bulk industrial portfolio. We also started $100 million of new development projects at solid yields, bringing our total starts year-to-date to $419 million.

Now, I’ll turn it over to Jim Connor to give a little more color on our operations..

Thanks, Denny. Good afternoon, everybody. From an operational standpoint, we had a strong quarter of leasing at 5.9 million square feet, as Denny noted.

Our tenant retention was a little over 58% because in this tight industrial market we’re able to opportunistically upgrade the quality of our tenants and the economic terms of the leases in place by bringing some new tenants that’s indicated in the overall improvement in our occupancy during the quarter.

Now, let me touch on some of the key activity within each of our product types. With respect to our industrial portfolio, we continue to see fundamentals improve with completion of 5.1 million square feet of total leasing.

In-service occupancy in the bulk industrial portfolio was 96.6%, 200 basis points higher than a year ago and an all time high for us. In addition to the exceptional leasing execution by our team, we continue to capture rental rate growth, which is a key focus of company right now.

With growth on industrial lease renewals of 9.2% for the quarter, the highest growth rate in 12 years. We are seeing broad strake in industrial leasing across all our markets.

As an example, our Indianapolis portfolio best in class modern bulk industrial product continues to benefit from strong demand from regional and national companies that are modernizing supply chains, as well as the e-commerce players choosing Indi as a primary distribution location.

Our 19.4 million square foot Indianapolis portfolio is 99.7% occupied with only 60,000 square feet of available space in service buildings. The Indianapolis market wide industrial vacancy is just over 5%. Our Indianapolis portfolio has realized average net effective rent growth of 12% year-to-date, up from the mid single-digit level last year.

Some other notable new leases signed during the quarter that drove occupancy higher were in Savannah where we signed two new leases totaling 1.2 million square feet with Home Depot national distribution centers.

We also executed a new lease for 446,000 square feet at Nashville with B&G Foods North America and a new lease for 216,000 square feet with UPS Supply Chain Logistics in central New Jersey. On the lease renewal side, we also executed a 414,000 square foot lease with General Motors in Cincinnati.

We are 95.5% leased or better in 18 of our primary 22 markets with six of our markets at 100% occupancy, which positions our portfolio in the sweet spot to continue to push rents and reduce concessions.

Now turning to the medical office, the portfolio continues to perform well with an in-service occupancy level of 93.9% and the same property NOI up nearly 6% on the trailing 12 month basis driven by a combination of occupancy increases, rent growth and operating efficiencies.

The suburban office market continues to improve with our in-service occupancy up 30 basis points over the prior quarter after excluding the effect of dispositions and a partially leased development project that was placed in service. Our team had an exceptional quarter leasing with nearly 700,000 square feet of leases with notable activity in St.

Louis market where we signed 12 leases totaling 244,000 square feet which improved occupancy 80 basis points in that market. We have also signed an additional 60,000 square foot new lease in the St. Louis market in early October.

Turning to development, we had a $100 million of development starts in three projects in the third quarter, totaling 1.1 million square feet expected to generate a 6.8% weighted average initial stabilized yield.

Two industrial developments commenced, the first was a 150,000 square foot build to suit industrial project on our land in the Gateway North Center in Minneapolis with Blue Dart Corporation.

This is our third build to suit in the Gateway North Business Park in the last 10 months which is another testament to our development expertise and our strategic land holdings. I would also point out that as of today we’re now 100% leased in Minneapolis.

The second industrial development is a 783,000 square feet speculative project we started in Southern California.

The project is located in the Inland Empire, a market has absorbed over 25 million square feet of space year-to-date according CBRE, a pace that is slightly ahead of last year, while vacancy has dropped to mid 4% range down from the low 5% from the area a year ago.

Finally, I’ll note that our 5 million square foot industrial portfolio in California, we’re currently 97% leased and believe it is the opportunity time to start speculative development in that market. On the suburban office side, we started another project in Raleigh in our Perimeter Park development.

Perimeter 4 is a six storey 192,000 square foot Class A office building. As many of you know, we owned prime land at in Raleigh adjacent to the Research Triangle Park and the Raleigh International Airport and are benefiting from an economic boom in the region with single-digit office vacancy rates and markets rents up 3% year-over-year.

The current project is 71% pre-leased to ChannelAdvisor Corporation, with a promising list of prospects to fill the remaining space. Many of you will remember that in 2013, we started two similar projects in the same park in Raleigh.

I’m pleased to note that both those project were delivered on time and have been leasing ahead of budget currently at a combined 85% level. The two delivered projects are on target to achieve projected stabilized yields in the mid 9% range.

From an overall development pipeline perspective, at quarter end we have 24% projects under construction totaling 8.3 million square feet and a projected a 627 million in stabilized cost at our share, that are 59% preleased in the aggregate.

This pre-leased percentage is down a bit from previous quarters due in fact as Denny said, this quarter we placed 3.6 million square feet of developments in service that were 98% leased in aggregate.

Our current pipeline has an initial cash stabilized yield of 7.1% and a GAAP yield of 7.7%, once again highlighting the tremendous value creation being executed by our team and the value of our strategic land holdings. Now I’ll turn it back over to Denny to cover some of our asset recycling activities..

Thanks Jim. With respect to investment activity, we had a $175 million of primarily suburban office dispositions during the quarter across three transactions. As we alluded to in the last call, we’ve been focused on selling suburban in the Midwest as well as taking advantage of good market pricing to sell a few select assets in the Southeast.

As many of may have seen in the news, we closed on the sale of the Royal Palm buildings in Broward County, Florida. These two buildings encompassed 466,000 square feet and were sold for $275 per square foot.

We acquired this complex in 2010 and had a gross investment basis of about $245 per square foot, which represents excellent value creation for shareholders. The second disposition transaction we closed in the Southeast was Millenia Lakes in Orlando. This was a three building complex held in joint venture and included a 12 acre parcel of land as well.

The office complex was sold for about a $193 per square foot with total net proceeds to us of $40 million, which represented nearly 25% gain over the gross basis. Finally, we sold an 11-building 2.1 million square foot non-strategic industrial portfolio in Indianapolis, also held in joint venture where we had a 10% ownership interest.

Our share of the sale proceeds for this disposition was $7.4 million. On the land side, we sold 9 million of non-strategic parcels during the quarter. In addition, I’ll note that combining land sales with development projects and in land year-to-date we’ve monetized 470 acres or about $84 million of land.

Now let me share and update about additional dispositions. We’ve alluded to on previous calls and some that are in the news. First, we have about 10 other transactions, mainly suburban office properties and our two remaining retail centers that are in the market or under contract. We expect to close these in the fourth quarter.

So a few may spillover into the first quarter. All of these transactions are part of our 2014 disposition guidance. There are two other larger deals recently offered to the market that have been in the real estate news.

The first is an industrial portfolio comprised of 56 non-strategic building, 5.9 million square feet for an average of about 100,000 square feet per building. The portfolio is currently 91.7% occupied and the buildings are on average 23 years old. This industrial portfolio is located in primarily Midwest cities.

With the recent compression in cap rates we’ve seen for this type of industrial assets, we believe this is another great value creation opportunity. Timing wise, we expect bids on the portfolio in about a month and would expect to close early next year. This package is not part of our 2014 guidance.

The second large package recently put out on the market and in the news is a nine building 1 million square foot 90% occupied suburban office portfolio located in Saint Louise and two office parks known as [Medical] Center and Woods Mill.

We expect the timing of this sale to be in late first quarter of next year and also these are not part of our 2014 disposition guidance.

To summarize our asset transactions, we continue to take advantage of a favorable window in the real estate and capital market cycles to maximize proceeds in suburban office and other non-strategic assets and allocate capital primarily into value creating development activities or further deleveraging actions.

I’ll now turn the call over to Mark to discuss our financial results and capital plans..

Thanks, Denny. Good afternoon, everyone. As Denny mentioned, I would like to provide an update on our financial performance, as well as an overview of our capital transactions. Core FFO was $0.30 per share for the third quarter represented by strong operational performance, delivery of developments and offset a bit from dispositions.

Same property NOI growth for the 12 and 3 months ended September 30th was 3.8% and 6.0% respectively. The quarterly number is higher than expected due to exceptionally strong leasing activity, rental rate growth across all product types and extremely low bad debt expense for the quarter.

As Denny noted, our growth in average net effective rental renewals was 9.0% for the third quarter and is 8.0% year-to-date. This growth in net effective rent was driven primarily by rent growth in our industrial portfolio where we’re optimistic about our ability to continue to push rental rates.

We generated $0.26 per share in AFFO, which equates to a dividend payout ratio of 65% compared to $0.25 per share in the second quarter. We expect there will be an uptick in second generation CapEx during the fourth quarter related to our recent leasing activity, which is reflected our revised annual AFFO guidance of $0.95 to $0.97 per share.

As we continue to improve our overall operations and have a higher percentage of our income come from high quality lower CapEx old properties, we’re producing a consistent growth in AFFO and driving down our already conservative AFFO payout ratio.

As we previously mentioned on last quarter’s call, we issued 3.1 million common shares through our ATM program in July raising total proceeds of $55 million. These were issued at an average price of $18.09 per share.

Later in the third quarter we raised an additional $10 million of proceeds through the ATM program at an average price of $18.58 per share.

Building and land sales generated a $185 million of proceeds during the quarter, a portion of these proceeds were used to redeem our $96 million and 6.625% Series J preferred shares, which will resulted in over a $6 million annualized reduction in preferred dividends.

All of these capital transactions coupled with our operational performance resulted in a continued trend of improvement in our key financial metrics. We reported a fixed charge coverage ratio of 2.4 times for the rolling 12 months ended September 30th compared to 2.0 times we reported for the year prior.

For just the third quarter, fixed charge coverage is now up to 2.5 times. Net debt plus preferred to EBITDA for the rolling 12 months ended September30, 2014 was 7.2 times compared to the 7.4 times we reported last quarter and 8.3 times we reported for the rolling 12 months ended September 30, 2013.

When looking at this metric for just the current quarter, it improved to 7.1 times. Also during the quarter, we closed on a renewal of our unsecured revolving credit facility increasing the potential maximum facility size from $850 million to $1.2 billion at a 20 basis point reduction in rate and extended the term to January of 2019.

We are in an excellent liquidity position and our leverage metrics continue to improve. We are very well-positioned to continue bolstering the balance sheet, fund our development pipeline and address our next significant debt maturity in February 2015. I will conclude by saying that I’m very happy to report an another strong quarter.

And with that, I’ll turn it back over to Denny..

Thanks Mark. As a result of this outstanding performance, we are pleased that yesterday we were able to raise the low-end of our guidance for FFO per share by $0.02 narrowing our 2014 range to $1.17 to $1.19 per share and raising the midpoint by $0.01.

Similarly, as Mark said, we raised our guidance for AFFO per share by $0.01, narrowing our 2014 range to $0.95 to $0.97 per share. We also range same-property guidance from a range of 2% to 4% up to a range of 3.75% to 4.5%.

In closing, we are pleased with our team’s outstanding operational performance and allocation of capital year-to-date and expect the solid finish to the year.

We believe dispositions currently in the market will continue our asset recycling into primarily high quality development projects, continue to increase overall quality and stability of year-over-year growth of cash flow per share. With that, we’ll now open it up for questions.

And we ask to participants to keep the dialog to one question or perhaps two very short questions. You are of course welcome to get back in the queue. Thanks. Go ahead..

(Operator Instructions). And our first question we’ll go to the line of Jaime Feldman. Please go ahead..

Hey, thank you and good afternoon.

Just I guess it’s a quarter later, can you guys just give a sense of which markets this quarter you sense are still taking up that maybe weren’t quite as strong last quarter? And then which you think you are starting to get more concerned about supply or maybe just slowing down on the demand side?.

Sure Jamie. I think no matter who’s numbers you use, across the country you’re seeing great activity, great net absorption. I think, you started to see some numbers in -- I’ll just kind of work my way around the country. Atlanta and Chicago and Pennsylvania all had good quarters of net absorption. Those markets are all in very good balance.

Going down south, Houston had another good quarter. Their pipeline of spec development continues to be well leased. Dallas as we have talked about, increased the amount of spec space a little bit. So I think that’s we’ve got our eye on that market. Southern California just continues to perform at a huge level as I reiterated earlier.

They had another I think approaching 6 million square feet of net absorption in the third quarter. I don’t t think if missed any. It’s some of the secondary markets. Cincinnati had a great quarter, some of the Florida market, South Florida had another great quarter of leasing there. So those are kind of really the highlights going around the system.

Dallas is probably the only one that we’re watching a little bit. Some people have referred to Indianapolis but as I alluded to in the call, our Indianapolis portfolio is performing so well. We chose to build some additional product down there just to have some expansions base for our existing tenant base. So we feel pretty good about that market.

And I think that’s really the highlight..

And just a follow-up.

As you think about some of these secondary markets that are starting to pick up, is it the same types of demand, is it ecommerce, is it supply chain or is there something different happening in those markets?.

Well, I think the big ecommerce is primarily the Tier 1 markets. You are seeing some of the infill leasing for some of the e-commerce guys and some of the secondary, tertiary markets, but the big notable million square feet deals that our favorite retail and ecommerce companies are primarily in the Tier 1 markets.

You just, you’re seeing good activity across all sectors in the industrial pipeline. So, I think e-commerce continues to be a big part of the performance but you cannot credit it solely to e-commerce like you probably would have maybe two or three years ago.

I think you’ve got just the macro economy that’s pretty much hitting on all cylinders from the industrial perspective..

Thank you. Next, we’ll go to line of Vance Edelson. Please go ahead..

Terrific, thanks. So, just on selling the 11 industrial buildings in Minneapolis, it’s a market you described as very robust and it’s benefiting from the e-commerce.

Could you share a little more on what the JV’s rational was for pulling out of those assets?.

Sure Vance. That is the JV that we formed back before we went public back in 1992. So, as we said in prepared remarks, we only owned 10% of that and the rest of it is owned by institutional investor.

And obviously a 22 year run which is tremendous run for them on those assets and they just decided to -- that they were ready to sell and move onto something else. So as since the [vector] was in place for 22 years, those assets were getting older in nature and so they wanted to sell.

And again I think the results from that disposition were extremely favorable and we’re seeing that in the markets really I would say across the board today. .

Did you have an opportunity to buy them but they’re older assets, so you didn’t want them?.

Yes, we could have bought them, but yes that’s right. You know that our philosophy is that with the new larger modern bulk product and that’s what we’re really focused on, on the development and has been on the acquisition side..

Okay. And then….

You’re less than 200,000 for the building and your average age is well over 25 years..

Okay. That make sense.

And then with valuations on the office side continuing to move up, would you consider more non-core dispositions than you would have earlier in the year or perhaps even placing on the market what you want to consider to be more core if the price looks good?.

Well, I think we have sold some core what we would call core office product in the Southeast. Earlier this year we had the joint venture with 3630 in Atlanta then selling the Royal Palm buildings and Millenia buildings, those were all excellent core assets in I would call it core office market.

So, yes, we were happy to do that when we think the timing is right. And then as we said, we’ve got a big portfolio of suburban office assets in St. Louis that’s now in the market plus some other miscellaneous office product in various markets. So, we think the pricing is good right now and that’s what we’re experiencing.

So we’ll continue to prune that portfolio..

Next we’ll go to Kevin Baron. Your line is open..

Hi. Good afternoon. Denny, you kind of talked about already to mark that portfolio that’s available in St. Louis I guess for marketing. Could you just talk a little bit more about the strategy with the Midwest suburban office and the marketplace Cincinnati and St. Louis those assets are running in the low 80s for occupancy.

And the sales that you’ve completed in the past quarters have been more stabilized assets. So maybe just speak about how much lease up is needed just to generate that investor interest.

And then maybe just talk about the pricing trends that you’re kind of seeing within those particular markets?.

Well, let me start with the St. Louis. As we’ve said on the call, as Jim said that market is I would call it on fire for suburban office when you compare to what we’ve seen for a long, long time. And so, one of the projects that I mentioned on the call was around in the script was Woods Mill.

Woods Mill is a two office building portfolio we’ve owned for probably 10 years and it’s now 100% leased. And so there is some other product there that is also moving up and at a very high occupancy. So, we are looking at marketing those as we get those leased up.

And that again somewhat why our remaining occupancy always looks a little bit low because we continue to have good leasing success and then we mark those assets for sale. The similar story I would say over in Cincinnati, but probably not the level of leasing activity that we’ve seen in St. Louis at this point in time.

So, we continue again earlier this year, we sold about $150 million package in Cincinnati and we continue to look at other opportunities to sell some of those assets also..

Okay. And then just one follow-up. If you look at the development page in the supplemental, the developed margins declined from 21% last quarter to 18% if you kind of look at the midpoint of the projected value creation. So, another deliveries starts in the quarter impact your numbers.

But can you just walk us through what is pressuring those margins; is it new land costs or construction costs and then maybe how we should think about that over the next 12 months or so?.

Kevin, this is Mark. I’ll start with that and I’ll let Denny or Jim chime in on what’s left in that portfolio. But part of what’s driving the decrease in the margin is the product mix. We’ve placed in service this quarter a couple of our office projects down in [Riley] that Denny or Jim mentioned.

We’re in the mid 9.5% yield range with still obviously the margin on those projects on office site. We were getting better margins in the industrial that we’re left with. So, the development pipeline that sits here today is much more heavily weighted towards the industrial product than it was the office a quarter ago.

And then as it comes specifically to the margin on the industrial, Jim, I don’t know if you had anything..

Yes. And the only other comment, I think you’ll continue to see that number fluctuate a little bit depending on how much of the volume is in our newer markets. So for example, the Southern California is a market we’ve really just geared up to start the development in. We acquired that piece of property last quarter to be able to put it in service.

So, the yields there are not going to be as good as our mature markets where we’ve owned strategic land for a number of years on a really good basis. And I think 18% is still pretty good..

All right. Okay, thanks guys..

And next we’ll go to line of Brendan Maiorana. Please go ahead..

Thanks. Good afternoon. Looking at your leased rate, it’s very high. I think it’s about as high as it’s been. But if I look at the occupancy rate as you disclosed it on page 16, there is a pretty healthy spread between leased and average commenced occupancy.

And that’s a stat that you guys have only offered more recently, but it’s 350 basis points wide across the overall portfolio, it’s 370 basis points just in the bulk side.

How should we think about what a normalized spread leased versus occupied should be and what does that mean for occupancy trends as we think about it over the next few quarters?.

Yes, Brendan, I’ll see if I can try to answer part of that. That 350 basis-point spread was certainly wider than we have historically run out. We’ve been more in the 150 to 225 basis-point spread I would say, so the 350 is definitely wider. A couple of things I would point out.

If that spread is not that wide in our same property pool, if you look at the same property page in the supplemental, it’s the commencement occupancy is closer to the 95% range. So the spread on that pool is more like a 150 to 175 basis-point which is what we’ve been traditionally running at.

What we’re dealing with is only about 75% of our NOI right now is in our same property pool, because as we’re going through this dispositioning phase, we’re selling older assets and we’re replacing it with a new development pipeline that takes 24 months before it makes its way in same store.

So about 25% of our total NOI is not in the same property pool yet and that’s where we’re really seeing significant NOI growth. And I think that that 350 basis-point spread will translate into additional NOI increases as we get through the next several quarters; it just may not all show up in the same property pool. .

Okay.

And Mark just related to that, your occupancy guidance I think suggests that a modest dip in the fourth quarter; is there anything specific or just that’s just kind of natural expirations?.

Yes, Brandon our occupancy guidance is an average, not an endpoint. And if you look at it on average, what it really would suggest it will be right around a very top in the guidance. And because we were within that range, we just decided not to update the guidance..

Okay..

So, if there was any dip at all I would say it would be very, very modest..

Okay. And just real quick one, you have $250 million of debt with February maturity and high rates, 738.

So, I think can you pay that off three months early and if so, what would be likely rate if you were to go to the market today?.

Yes, we’re probably looking at 4%, maybe just under 4% for 10 year money give or take right now. We could not pay it off early without a fairly substantial make whole premium.

And we’re looking -- as Denny mentioned, we have a lot of dispositions in the pipeline, we do like the debt rates we have right now, but we’re just trying to right now Brendan balance out the disposition proceed with the maturities we have coming at us.

There is a lot of different ways we can take care of that February maturity, but needless to say that all pretty attractive relative to the rate we have on that debt. .

Great. Thanks..

And next, we’ll go to line of Eric Frankel. Please go ahead. .

Thank you very much.

Just hoping you can maybe just explain operating expenses; they seem to be at a pretty low rate this quarter, especially about that some of your peers have reported some higher operating expenses just I was, I want to get an explanation whether it’s a one-time thing or you expect operating expenses to ramp up over the next year or so?.

Yes Eric, I guess to be honest with you, it didn’t really pop out to me or us that they were that extremely low. Operation, we have pretty good quarter overall, but just trying to think here, not been stuck. We obviously had very high operating expenses in the first quarter with weather related issues.

I guess in a lot of our cities, the first quarter and the third quarter is really the highest quarter of operating expenses we have because of weather conditions either cold or hot. And we have a pretty mild summer, so that maybe a part of the driver. So I’ll have to look into that and get back to you again..

Okay. Just my follow-up question regarding the leasing spread. So, Jim you commented you’re able to -- a little bit higher quality rental.

Could you comment on leasing spreads for those new tenants are in place?.

Well, we’ve certainly -- that’s been a lot of time talking about this in the last few quarters. We continue to monitor very closely the number and percentage of leases in the portfolio that we’re done in the trough period that 2009 to 2011 period. And we’re generally working out on the renewal side, the next two to three quarters.

So, the next 18 months we still got about 50% of the portfolio rolling, 50% of the square footage that is rolling in the next 18 months is from that trough period. So, we were seeing very good opportunity to push rents there. The other place we’re pushing back is concessions are down and lease terms are up.

Because our occupancies are so high, we’ve got certain tenants that we want to renew for shorter periods of time that we’ve got limited opportunity to push the rents and extend the terms out. So that’s what we’re trying to take advantage of that. So that’s the first piece of its is, the trough rents.

And the other piece of it is just a result of the high occupancy. When most of our operating units are above 95.5%, they can dictate some pretty good terms. So we’ve been pushing a lot on not only the rental rates, but also the annual increases.

And we’re pretty consistently getting 2.5% increases now on our industrial annual escalations, which has been a pretty healthy improvement over the years gone by..

And Eric, as you know we’ve not historically tracked new leasing spreads and a lot of that we’ve talked about has been because as we were more predominantly office, it was really hard to measure one lease to the other because the type of build out and space was actually different since lot heard on the office side than the industrial.

But we’re trying to track that data now on the industrial side. And I would tell you that the spread on our new leases on the industrial is maybe 100 basis points lower than the renewal spread, but they’re very much in some ballpark on the industrial side..

Okay. Thanks for the color..

Next we’ll go to line of Dave Rodgers. Please go ahead..

Yes. Good afternoon, guys. Maybe Jim to start with you. On the development side, I think you need $80 million to $180 million of development starts in the fourth quarter to hit your guidance. I assume you have good visibility on that. And that’s not going to be an issue.

But I guess I’d love to know what you’re thinking in terms of kind of the runway for development kind of the total pipeline as you think without giving guidance for 2015.

But how does that build the two pipeline look and any kind of timing issues where we’d see a slowdown or could see a pick-up in the development activity overall?.

Well Dave, I’m going to have to choose my words very carefully because I’ve got three guys in the room looking at me now. I would tell you and I think everybody would have the same sense as you look at where we are in 2014 and what we need to achieve to hit hard, the midpoint of our guidance, I would tell you I think we all feel very good about that.

As you look at the U.S. industrial market, you’ll look at the improving office market; you’ll look at the healthcare business all of which contribute to our new development pipeline. I would tell you we have the same sense of confidence for 2015 that we’re currently enjoying. So, I think we’re reasonably optimistic..

Okay.

And then maybe on the medical office side, are you still seeing opportunities to do development in medical? And on the flip side, given the strength in cap rates and valuations of assets I mean is it maybe to think about maybe putting more of those out to market as well as you move into 2015?.

Well, to answer the first question, yes, we’re seeing a lot of additional opportunities. As the healthcare industry as a whole continues to go through an ambulation, we’re seeing a lot of off campus opportunities. We’re picking and choosing those on a very limited basis. We like those that are in line with major systems and long-term lease components.

We like those that tie into our existing core markets. So, we’re continuing to see those. On-campus opportunities probably not as strong as the off-campus opportunities in terms of just of the pure numbers. But I will tell you there are a lot of very big projects out there in the marketplace.

So, we think the pipeline for the medical business is very strong for the fourth quarter and for going into 2015. In terms of spreads, the medical business is enjoying great cap rate compression just like the industrial business is. And we could monetize large pieces of that at anytime if we so chose.

I think as we’ve demonstrated and consistently told you guys in the last quarter, we’d much rather take advantage of the opportunity to reposition the portfolio through the sales of the suburban office properties because we’re getting real good cap rates there that historically we haven’t seen.

The only thing you see ourselves would be pruning the portfolio, we prune the MLV portfolio late in 2013 with a few assets trickling in it early 2014. We really don’t anticipate we need to do that.

You will see that portfolio that Denny talked about earlier on the industrial side, again that’s just kind of pruning the portfolio some older and some non-strategic assets for us. So, I think that will be the extent of it in those two product types..

Okay. Thank you..

And next we’ll go to line of Ki Bin Kim. Please go ahead..

Thanks. I’m not sure, if I missed this, but the two other larger deals that you said are out for sale and I realize you have closed yet.

But did you talk about a dollar range for those assets on a cap rate range?.

We didn’t really talk about that. I guess I would -- and especially since we’re in the market right now, I’d rather not talk about that. So, what I can say Ki Bin is that those are included in the guidance as we said in the call that there -- actually two big ones are not included in our guidance.

I mean there we don’t anticipate either one of those to close till sometime probably in the first quarter of 2015. So, those would be included in our 2015 guidance when we give that..

Let me ask this in a different way.

Are those assets for sale on par with average asset quality in those respective markets?.

Yes, I guess I would say so. I mean once an industrial portfolio of smaller buildings, older buildings, so I’d say as that kind of portfolio goes, this is a pretty good one. And then the suburban office assets are in St. Louis and those would be typical good parts in suburban St. Louis, yes..

Okay. And just the last question from me and someone -- I know you alluded to it little bit Mark on your lease spread about -- regarding new lease spreads that which you historically haven’t going in [your term out].

If I look at the rent, just the average net effective rent for what you find in both industrial and office in 2013 and three quarters in 2014, it seems like in every quarter, the net effective rent just broadly speaking is lower in new leases than they are for the new leases signed -- sorry, for renewal leases.

So it just makes me wonder that is it just lower quality type of assets that are under a new lease bucket or what cause net effective of rent to be consistently lower?.

That’s just purely a factor of the market Ki Bin. I mean you got our industrial leases range anywhere from call it high $2 to $6.5 a foot, depending on what market you’re in and exactly what type of industrial building it is.

So it’s really just product mix even within the industrial portfolio and locations driving that? We look at the overall deal quality of all of our deals which we take the total CapEx and concessions to get a deal done by the total rent we’re going to collect over the life and I would tell you that the overall deal quality on all those deals are better and better every quarter..

Okay. That’s it for me. Thank you..

Thank you. Next we’ll go to Michael Salinsky. Your line is open. .

Hi guys. Just given the significant disposition activity you had year-to-date.

Any consequences there from a dividend standpoint that would fortunately kind of push some of that into ‘15, it will require special dividend or 1031?.

No Mike, we should be good to go there. The acquisitions that we have done this year, we pretty much did all 1031 deals with that already. So that mitigated whatever exposure we may have had. So we should have a bit of room before we bump up against any kind of special dividend issues..

Okay. That’s helpful. And just as my follow-up. As you think about the leverage for the company, I mean when you were walking to the plan and deleveraging over last few years, you had a very stated target.

Can you give us a sense kind of what target leverage for Duke we should expect going forward with kind of the range now as you made significant progress year-to-date you seem to be on a course for next year?.

Yes. Always really kind of laid out here right now, Mike is to get that fixed charge up about 2.5% to get that plus preferred to EBITDA down below 7.0% and keep that debt plus preferred to gross asset number in that 48% range through the year-end ‘14. And now what’s really going to drive that are the dispositions that we’ve talked about.

And how quickly they come in and how we utilize the proceeds from that I guess is what I would say.

So, as we give 2015 guidance at January, I think we’ll have a better view on what our net disposition level will be and uses of those proceeds and at that time I think we’ll be in a better position to get some more concrete guidance on where we’re headed towards the leverage. But needless to say, it will be an improvement of where we are today..

Thank you very much. .

(Operator Instructions). We do have a follow-up from Kevin Baron. Please go ahead..

Yes.

Mark and Denny I appreciate you don’t want to negotiate against yourself I mean back to sales, but maybe you can just share with us just the annualized NOI of each portfolios and then we can apply whatever cap rate we want in terms of determining value?.

Well, I certainly would if I had any idea what they were sitting here today.

So, on the industrial portfolio, Mark you said it’s about 21 million?.

Yes, it’s in the low 20..

And again I don’t really know what the office side is. But let me I guess I mean I think basically if you put these two together, we’re targeting let’s say $425 million to $450 million range between those two portfolios something like that..

Okay. And then as we think about the same-store growth in the quarter, up 6, rents up 5, expenses up 3.3.

Was there anything either in this quarter or in 3Q of ‘13 that would have changed that number relative to what you’ve been doing year-to-date closer to 4?.

Yes Michael, I would say that I think I commented briefly on bad debt expense that was probably about 1% of the 6% right there. Not to say that the prior year’s quarter had high bad debt expense, but this quarter was virtually non-existed. So that change right there was probably about 1% of the 6%.

The rest of it was the combination of occupancy and rental rate growth. I would tell you that as you look forward and I forget if there was Kevin or Brandon or who has brought up the spread between our leasing rate and our occupied rate, but most of that spread is not in a our same property portfolio.

Our same property portfolio is now got a pretty high commencement level. So, as you look forward, it’s probably not going to have quite the same occupancy growth going forward, but we did have very good occupancy growth this quarter over last year. So, some 1% of that was kind of bad debt anomaly..

Okay. And then just going back to the value creation in the development pipeline and I know 18% margins at all, which is still high. But as you think about the spread to what you’re developing to and what you’re evaluating the math. If you look at this quarter, you’re about a 110 basis points spread, last quarter you were a 130.

In this quarter you dropped your applied cap rate now. I think I heard Mark talk about mixed shift in terms of the stuff at KML, which would have dropped the pipeline expected deal from 7.4 and 7.1. How much of it was reevaluation on the value of those assets that you have in there to drop the applied cap rate for value creation from 6.1% down to 6%..

None of it Michael. The way we do that calculation we lock in our estimated cap rate the day we start the building. So, the way we look at it right, wrong aren’t different is once you go forward than that from that point on it’s a passage of time or it’s leasing activity. So the day we believe we create the value, the day we start the building.

So we lock in the estimated market cap rate on that day that we will adjust our yields as we lease up faster or slower than what we had, but the cap rates locked in. So, none of that was due to your question, it was due to like you haven’t confirmed that. .

Okay. That’s helpful..

And again Mike, I would say it’s really, it is product mix generally and that can vary on the industrial side, for example market to market though. You kind of spread; you are going to get maybe more in one market versus another. So, it’s just what’s in that pipeline, it’s a way that around..

Okay. And just last one I just want to ask one more just on the medical office and I know we’ve had this discussion overtime just in terms of that piece and I know you provided a lot of good opportunities for development and you have a pretty good franchise that what you have been able to build up going back when you number of years ago.

As I think about how you have transformed the portfolio, you think about these other portfolios you’re putting on the market going deeper into the company and pulling out some industrial office, pulling out more suburban office.

I guess, do you step back strategically and sort of say hey, in a couple of years the first line of this press release not read Duke Realty Corporation a leading industrial suburban office and medical office property REIT, it will just be Duke Realty a leading industrially REIT.

And do you think about a more strategic larger scale exit to get value for the platform you’ve created in the medical office and you get paid for the value creation in future projects or you just become a more pure play industrial company?.

Well Michael, I think, if you look back historically over the last four, five years, we’ve certainly gone that direction. I mean we were 35% industrial five years ago, we’re now pushing 65%.

But I think what the way we look at it is, we’re now in a position that we really like the overall portfolio, we know we still have some assets and again as we’ve been saying primarily older Midwest suburban assets that we just don’t really want own long-term. So we’re looking at more what don’t, we want to own long-term right now.

And the good news is we can take those proceeds from this dispositions and as we said we can put those into our development pipeline and really self fund our development and overall increasing the quality and the kind of assets that we own.

And so we like doing that today, both with the bulk industrial and the medical office because we know we’re creating a lot of value there. And then just as far as -- and again if you look at the timing, I don’t think there is, we haven’t seen a better time in quite a long time to sell these suburban office assets. So that’s what we’re focused on.

And then as far as pruning the portfolio as Jim mentioned, we did prune that MOB portfolio to the tune of about $0.25 billion about a year ago. And we’re doing the same thing now with this industrial package. So we’re just really trying to take advantage of things going on in the market to continue overall improved quality of portfolio..

Great, thanks for the color Denny..

We do have a follow up from Eric Frankel. Please go ahead. .

Thank you. Just to clarify, Mark. I guess I was more specifically wondering about [pass-through] on your operating expense line item.

Just maybe you could provide a little bit of color what taxing authorities thinking of various markets in terms of reappraisals and where that can go in the next year or two especially with appreciating property prices everywhere?.

Okay, yes. Because I do some math Eric, and I wasn’t noticing an overall big lift in operating expenses overall. So, I still can’t answer your question.

So, I’ll have to take a look at that but I will tell you that obviously we’ve got an in-house property tax staff and they’re pretty good at staying on top of what’s going on out there and doing fields where they need to be. So I will follow up on that and get back to you..

But also on the industrial side Eric, they’re more like net leases. So those increase especially when you’re at 96% leased on the industrial side, virtually all those increases pass-through. And I would say that’s probably why our expenses are down a little bit because our occupancy is up. And so we’re passing more of that stuff through.

Mark, can you explain it, but I’m taking credit for it.

How is that?.

Fair enough, fair enough.

And perhaps Jim, maybe to talk through leasing prospect for your spec developments and obviously that’s been increasing a little bit over the last year, you’ve also been super successful with all the hit, but obviously you take a little bit more risk in the development pipeline, maybe you can touch upon the leasing activity?.

Yes Eric, I would tell you that we’re very optimistic that we’ll have the opportunity to announce some new deals in our spec development when we report our fourth quarter numbers in mid January. I think the performance of our local teams is demonstrated.

If you go back and just look at our historic track record, we’ve done over the last few years, 15 spec projects with the total value of $285 million. When we started them they were 23% pre-leased and they’re currently 95% pre-released.

So, we have not been as aggressive on the spec side as some of our peers as shown in the percentage of our development pipeline that was pre-leased. But we’ve made really – we’re covering all our debt.

So I would tell you that everything we’re seeing in the marketplace today we continue to believe we can execute on all those with the consistent kind of track record that we’ve been able to do in the last few years..

Okay, thanks. Appreciate it..

We do have a follow-up from Jamie Feldman. Your line is open..

Great thanks. Can you guys talk a little bit more about the depth of buyers for the assets you have in the market, leverage and private versus public.

Just what are you seeing out there?.

Well, we’ve got I think we’re all extremely pleased with the depth of buyers potentially that are out there. We have a single asset, just I'll give just a couple of examples that I think will give you some color. We have a single asset, office asset in St. Louis that we're finalizing the process on right now I'd say.

And we had 12 offers on that building. Again a larger single asset in the [Clayton] sub market. And I would say 6 of the offers were very good and very competitive and very close. On that industrial portfolio, we had 20 CA signed in the first hour that our folks began marketing that one. So, the activity is very good and very strong.

It's kind of a wide range of buyers, but I would say most of these are more of the private equity kind of buyers, some little bit more on the institutional side. Not I would say generally speaking, what we're selling it isn't public REITs that are looking at this product. So, seems to be deep pool of buyers.

And quite honestly all these are being conducted without planning contingencies right now. But there is plenty of secured debt available for that even when number of buyers have unsecured lines that they can use for acquisitions today. So, the financing really isn’t an issue right now..

Do you share some kind of leverage, would you?.

I don't know for sure and I think it quite varies from transaction to transaction, Jamie. But I think probably in the 60% give or take leverage range on most of these transactions today. And they are all pretty clear, Jamie, there is no doubt on any of these..

All right, great. Thank you..

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

I’d like to thank everyone for joining the call today. I will look forward to see many of you at upcoming NAREIT meetings or at our Atlanta Property Tour on the late afternoon at NAREIT on November 6th. Also note that our fourth quarter and year-end call is tentatively scheduled on January 29th. Thank you..

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect..