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Duke Realty Corp. (DRE - Analyst Report) reported a positive earnings surprise of 7.4% in fourth-quarter 2013. In particular, the company’s core FFO (funds from operations) came in at 29 cents per share surpassing both the Zacks Consensus Estimate and the prior-year quarter FFO by 2 cents.

Better–than-expected revenues and higher net operating income (NOI) attributed to the year-over-year increase at this real estate investment trust (REIT). Including certain one-time items, Duke Realty’s FFO per share came in at 28 cents in the reported quarter, up 3 cents year over year.

Total revenue for fourth-quarter 2013 was $272.6 million, up 7.9% year over year and comfortably exceeded the Zacks Consensus Estimate of $240 million.

Also, for the full year, core FFO stood at $1.10 per share, up from $1.02 per share in 2012. This was within the company’s core FFO guidance range of $1.07–$1.11 per share. Additionally, reported FFO increased by 9 cents year over year to $1.07. Moreover, revenues surged 3.4% year over year to $1.08 billion in 2013.

Quarter in Detail

In the fourth quarter, same-property NOI advanced 2.3% from the year-ago period. This was aided by occupancy and rental rate hikes.

Duke Realty leased around 11.2 million square feet of space. Tenant retention was about 91% and the company experienced overall positive renewal rental rate growth of 5.1%. Overall, portfolio occupancy of was 94.0%, up from 93.4% in the prior quarter.

As of Dec 31, 2013, in-service portfolio occupancy inched up to 94.2% from 93.5% on Sep 30, 2013. By segment, in-service occupancy in the bulk distribution portfolio was 95.3% (up 70 bps sequentially), while that in the medical office and suburban office portfolios were 93.7% (up 10 bps) and 87.8% (up 60 bps), respectively, at the end of the quarter.

Notable Portfolio Activities in Q4

Duke Realty purchased two high-quality modern bulk industrial facilities positioned in key distribution markets worth $73 million (1.2 million square feet in total). It included one industrial asset (965,000 square feet) in Chicago and another (226,000 square feet) in Miami. Both the properties are fully leased.

Moreover, Duke Realty experienced its strongest ever quarter of new development activity and started $362 million of highly pre-leased bulk distribution and medical office projects during the quarter. At the end of 2013, the company had 6.1 million square feet under development across 24 projects, including two 50% owned joint venture development projects. For the properties that were 89% pre-leased, the total budgeted costs were $661 million.

Additionally, Duke Realty made dispositions worth $412 million in fourth-quarter 2013. This included divestiture of 15 medical office properties, 11 suburban office properties and 1 smaller non-strategic industrial property.


Duke Realty exited the quarter with $19.3 million of cash, compared with $33.9 million at the end of Dec 31, 2012.


Duke Realty provided the guidance for 2014. The core FFO per share is expected to be in the range of $1.11 to $1.19 per share. The Zacks Consensus Estimate for 2014 FFO per share of $1.12 per share also lies within this range.

Dividend Update

Duke Realty declared a quarterly cash dividend of 17 cents per share on its common stock. The fourth-quarter dividend will be paid on Feb 28, 2014, to shareholders of record as of Feb 14.

Our Take

After posting in line results in the past few quarters, Duke Realty finally came with impressive results this quarter. We expect this enhanced operating portfolio performance and portfolio enhancement activity to drive growth going forward. We believe Duke Realty’s focus on key markets will help boost its top-line growth going forward.

Duke Realty currently holds a Zacks Rank #3 (Hold). Some better ranked stocks in the REIT-Equity Trust – Other industry include PS Business Parks Inc. (PSB - Analyst Report), Ventas, Inc. (VTR - Analyst Report) and Public Storage (PSA - Analyst Report). All stocks 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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