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Real estate investment trust - Duke Realty Corp.’s (DRE - Analyst Report) second-quarter 2013 core FFO (funds from operations) of 27 cents per share was in line with the Zacks Consensus Estimate and a cent above the prior-year quarter FFO of 26 cents.
Better rental operations as well as a reduction in general and administrative expenses attributed to the year-over-year increase. Including certain one-time items, Duke Realty’s FFO per share came in at 25 cents in the reported quarter, flat year over year.
Total revenue for second-quarter 2013 was $275.5 million, up 5.6% from the prior-year quarter. Moreover, it comfortably beat the Zacks Consensus Estimate of $233 million.
Behind the Headline Numbers
Duke Realty leased approximately 6.2 million square feet of space in the reported quarter. Overall portfolio occupancy of Duke Realty was at 93.1%. As of Jun 30, 2013, in-service portfolio occupancy inched up to 93.2% from 92.1% on Mar 31, 2013.
By segments, in-service occupancy in the bulk distribution portfolio was 94.4% (up 80 bps sequentially), while that in the medical office and suburban office portfolios were 92.7% (up 180 bps) and 86.5% (up 200 bps), respectively, at the end of second-quarter 2013.
Tenant retention, during the quarter, was 74% and the company experienced overall positive rental rate growth of 2.0%. Therefore, aided by occupancy growth and rent increases, same-property net operating income (NOI) advanced 3.4% year over year.
Portfolio Restructuring Activity
During the quarter, in accordance with its asset repositioning strategy, Duke Realty accomplished $405 million of modern bulk industrial acquisitions. It commenced $82 million of new developments, including one suburban office development and 3 medical office buildings. Moreover, the company closed dispositions worth $202 million during the quarter that included proceeds of $188 million from the sale of a retail center in South Florida.
Finally, Duke Realty had 3.3 million square feet of development in progress across 18 projects. The total budgeted cost is nearly $513 million and the projects are 90% pre-leased in total.
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. The company exited the quarter with $21.4 million of cash compared with $33.9 million at the end of Dec 31, 2012.
Duke Realty lowered its overall cost of borrowing by issuing $250 million term note (bearing interest at LIBOR plus 1.35% and due May 2018) and repaying $425 million of unsecured notes (had an average effective interest rate of 6.4% at maturity in May 2013).
Moreover, a new At the Market ("ATM") plan was executed in May that helped the company issue up to $300 million worth of common stock. Around $27.4 million in proceeds were reaped by the company by issuing 1.5 million shares during the quarter, between the new plan and the prior ATM program closure.
Duke Realty raised its 2013 core FFO per share forecast to $1.07–$1.11, from the prior range of $1.03–$1.11. It also increased its outlook on proceeds from land sale to $40 million–$50 million.
Duke Realty also remains committed to enhance investors’ wealth through dividend payout. Concurrent with its second-quarter earnings release, Duke Realty declared a quarterly cash dividend of 17 cents per share on its common stock. The dividend will be paid on Aug 30, 2013, to shareholders of record as of Aug 15.
We believe Duke Realty’s portfolio repositioning to focus more bulk industrial business 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 increases operational risks.
Duke Realty currently holds a Zacks Rank #3 (Hold). Other better performing REITs include Winthrop Realty Trust (FUR - Snapshot Report), having a Zacks Rank #1 (Strong Buy) as well as Highwoods Properties Inc. (HIW - Analyst Report) and Prologis, Inc. (PLD - Analyst Report), both 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.