Duke Realty Meets Earnings, Guides Same

Zacks

Duke Realty Corp.’s (DRE) first-quarter 2013 core FFO (funds from operations) of 26 cents per share was in line with the Zacks Consensus Estimate and above the prior-year quarter FFO of 24 cents per share.

The 8.3% rise in year-over-year core FFO per share for this real estate investment trust (:REIT) reflects successful execution of strategic plans. In particular, overall occupancy improvement, strong same-property performance and lower preferred dividends aided the growth.

Including certain one-time items, Duke Realty’s FFO per share came in at 24 cents in first-quarter 2013, up 14.3% from 21 cents earned in the prior-year quarter.

Total revenue for first quarter 2013 was $268.7 million, up 1.1% from the prior-year figure of $265.7 million. However, it easily beat the Zacks Consensus Estimate of $223 million.

Behind the Headline Numbers

Duke Realty leased approximately 6.3 million square feet of space in the first quarter of 2013. Overall portfolio occupancy of Duke Realty was at 91.8% at the end of the quarter, down 60 basis points (bps) from Dec 31, 2012. The sequential dip resulted from 2 large divestures and lease expirations.

By segments, in-service occupancy in the bulk distribution portfolio was 93.6%, while that in the medical office and suburban office portfolios were 90.9% and 84.5%, respectively, at the end of first-quarter 2013.

Tenant retention, during the quarter, was 49% and the company experienced overall positive rental growth rate of 1.9%. Same-store net operating income (:NOI) of the overall portfolio increased 2.6% year over year.

Portfolio Restructuring Activity

In accordance with its asset repositioning strategy, Duke Realty sold non-strategic assets during the quarter and generated proceeds of $223 million. This included the divesture of a portfolio of 17 suburban office buildings (over 3.3 million square feet), 1 flex-type office building (144,000 square feet), 1 suburban office facility (300,000 square feet), and 2 non-core medical office buildings (156,000 square feet).

Duke Realty acquired $30 million industrial and medical office assets (approximately 473,000 square feet). In addition, the company initiated the development of various industrial and office facilities. These include – 1 bulk industrial facility (680,000 square feet and 100% pre-leased) in Nashville, Tenn.; 1 speculative bulk industrial facility (240,000 square feet) in Houston, Texas; 4 medical office facilities (aggregating 148,000 square feet and 100% pre-leased) in Dallas and Waco, Texas; and 1 suburban office project (200,000 square feet and 100% pre-leased) in Dallas, Texas.

As of Mar 31, 2013, Duke Realty had 6 industrial projects (2.8 million square feet), 12 medical office projects (750,000 square feet) and 3 office projects (703,000 square feet) under various stages of construction. These projects were 93% pre-leased on an aggregate.

Moreover, Duke Realty had 2 joint venture development projects under construction as of Mar 31, 2013. This included a 100% pre-leased medical office project spanning 274,000 square feet and a speculative bulk industrial facility totaling 600,000 square feet.

Liquidity

Duke Realty maintains a sound and flexible balance sheet with ample liquidity that enables it to capitalize on potential acquisition opportunities to fuel its top-line growth.

During the quarter, the company generated net proceeds of $572 million from an equity offering  of 41.4 million shares, raised capital by issuing $250 million of 10-year, senior unsecured notes and redeemed 8.375% Series O Preferred Shares worth $178 million.

At the end of the reported quarter, the company had over $307 million of cash compared with $33.9 million at the end of Dec 31, 2012. Currently, Duke Realty has no balance outstanding under its line of credit.

Reaffirmed 2013 Outlook

With the improved performance at Duke Realty, management reiterated its core FFO guidance for full year 2013 and expects it to be in the range of $1.03–$1.11 per share.

Dividend Update

Duke Realty also remains committed to enhance investors’ wealth through dividend payout. Concurrent with its first quarter earnings release, the company declared a quarterly cash dividend of 17 cents per share on its common stock. This new dividend will be paid on May 31, 2013, to shareholders of record as of May 16.

Our Viewpoint

We are impressed with Duke Realty’s first-quarter 2013 results, which were aided by an increase in same-property net operating income and the ongoing portfolio restructuring activity. Though a dip in occupancy will be a matter of concern in the near term, we believe Duke Realty’s portfolio repositioning to focus more on markets where it already has a strong presence, will boost its top-line growth going forward. In addition, the company has a relatively healthy balance sheet with adequate liquidity to repay debt. Yet, its large development pipeline increases operational risks.

Duke Realty currently holds a Zacks Rank #3 (Hold). Other better performing REITs include Regency Center Corp. (REG), Agree Realty Corp. (ADC) and Cousins Properties Inc. (CUZ), all of which carry a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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