Real estate investment trust – Duke Realty Corp.’s (DRE) third-quarter 2013 core FFO (funds from operations) of 28 cents per share came in line with the Zacks Consensus Estimate and 2 cents above the prior-year quarter FFO.
Better rental operations and higher net operating income (NOI) attributed to the year-over-year increase. Including certain one-time items, Duke Realty’s FFO per share came in at 29 cents in the reported quarter, up 3 cents year over year.
Total revenue for third-quarter 2013 was $291.7 million, down marginally year over year (by 0.5%) but comfortably beating the Zacks Consensus Estimate of $228 million.
Behind the Headline Numbers
Same-property revenue increased 3.4% year over year while expenses climbed 1.4%. As a result, same-property NOI advanced 4.4% from the year-ago quarter.
Duke Realty leased over 6.2 million square feet of space in the reported quarter. Overall portfolio occupancy of Duke Realty was at 93.4%, up from 93.1% in the prior quarter. As of Sep 30, 2013, in-service portfolio occupancy inched up to 93.5% from 93.2% on Jun 30, 2013.
By segment, in-service occupancy in the bulk distribution portfolio was 94.6% (up 20 bps sequentially), while that in the medical office and suburban office portfolios were 93.6% (up 90 bps) and 87.2% (up 70 bps), respectively, at the end of third-quarter 2013.
Tenant retention, during the quarter, was over 64% and the company experienced overall positive renewal rental rate growth of 2.6%.
Portfolio Restructuring Activity
During the quarter, Duke Realty purchased high-quality modern bulk industrial facilities positioned in key distribution markets worth $39 million (452,500 square feet). It included one property (342,500 square feet) in Central Pennsylvania and another (110,000 square feet) in Southern California. Both the properties are fully leased.
It commenced $76 million of bulk distribution, suburban office and medical office projects during the reported quarter. The company had 2.3 million square feet under development in progress across 18 projects, including one 50% owned joint venture development project. The total budgeted costs were $391 million and 85% pre-leased.
Moreover, during the reported quarter, the company reaped proceeds of $73 million from property dispositions. This included $44 million from a medical office asset (206,000 square foot) and the rest from a non-core industrial asset disposition and the sale of 65 acres of wholly-owned or jointly controlled undeveloped land.
Liquidity
Duke Realty exited the quarter with $24.1 million, compared with $33.9 million at the end of Dec 31, 2012. The company repaid 6 secured loans, aggregating $77 million that had interest at a weighted average effective rate of 5.6%.
Outlook Reaffirmed
Duke Realty reaffirmed its 2013 core FFO per share forecast of $1.07–$1.11.
Dividend Update
Duke Realty declared a quarterly cash dividend of 17 cents per share on its common stock. The third-quarter dividend will be paid on Nov 29, 2013, to shareholders of record as of Nov 14.
Our Viewpoint
We believe Duke Realty’s portfolio repositioning to focus more in key markets 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 and exposure to weak office markets increase operational risks.
Duke Realty currently holds a Zacks Rank #3 (Hold). Other better performing REITs include Getty Realty Corp. (GTY), Parkway Properties Inc. (PKY) and Sabra Health Care REIT, Inc. (SBRA), all carrying 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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