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Duke Realty Corporation (DRE - Analyst Report), a real estate investment trust (REIT), reported fourth quarter 2011 FFO (fund from operations) of $62.2 million or 24 cents per share compared with $71.8 million or 28 cents in the year-ago quarter. Fund from operations, 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.

Excluding certain one-time items, the recurring FFO for the quarter was $78.2 million or 30 cents per share compared with $73.9 million or 28 cents in the year-earlier quarter. The recurring FFO for the reported quarter marginally beat the Zacks Consensus Estimate by a penny.

For full year 2011, FFO was $282.1 million or $1.07 per share compared with $305.4 million or $1.23 in the previous year. Recurring FFO for fiscal 2011 was $303.2 million or $1.15 per share compared with $285.1 million or $1.15 in 2010.

Total revenues during fourth quarter 2011 were $305.6 million compared with $280.8 million in the year-ago quarter. Total revenues for fiscal 2011 were $1.3 billion compared with $1.2 billion in 2010.

The overall portfolio occupancy of the company, including projects under development, remained steady at 90.7% for the reported quarter. Tenant retention for the quarter was about 78.5%. Same-store net operating income (NOI) for the overall portfolio increased 4.7% during the quarter and 3.2% during the fiscal year. The company executed more than 24.5 million square feet of leases during 2011 in the overall portfolio.

In accordance with its asset repositioning strategy, which provides for increasing investment in industrial and medical office assets, Duke Realty sold non-strategic assets during the quarter, raising proceeds of $1.1 billion primarily from the sale of 79 suburban office buildings to The Blackstone Group L.P. (BX - Analyst Report).

For full year 2011, the company sold assets worth $1.65 billion. At the same time, the company acquired $388 million worth of industrial and medical office assets during fourth quarter 2011, spanning over 4.8 million square feet, bringing the total acquisitions for fiscal 2011 to $747 million.

At quarter-end, the company had 4 pre-leased medical office projects totaling over 295,000 square feet and 1 pre-leased office project totaling 344,000 square feet under development. In addition, Duke Realty had a single joint venture industrial project totaling 274,000 square feet under development. The company also started the development of a medical office building totaling 52,000 square feet of space during the reported quarter.

At year-end 2011, the company had nearly $213.8 million of cash. During fourth quarter 2011, Duke Realty reduced unsecured debt by over $500 million, bringing total debt at year-end to $3.8 billion. The total-debt-to-undepreciated-assets covenant was 48.72% at quarter-end, while the debt service coverage ratio was 2.22x.

During the reported quarter, Duke Realty renewed its existing $850 million unsecured revolving credit facility scheduled to mature in February 2013 in its concerted effort to strengthen its liquidity and reduce refinancing risk. The renewed credit facility is scheduled to mature in December 2015 and has an accordion feature that would enable Duke Realty to extend the maturity by an additional year subject to the fulfillment of certain conditions. At the same time, the company can increase the borrowing capacity of the credit facility by $200 million - $400 million to $1.05 billion - $1.25 billion.

Besides extending the debt maturity and improving the borrowing capacity of the company, the renewed credit facility reduces capital outflow with a significantly low interest rate. The new credit facility bears an interest at LIBOR plus 125 basis points, while that of the erstwhile credit facility was LIBOR plus 275 basis points.

With strong quarterly and fiscal performance, Duke Realty provided an initial guidance for fiscal 2012. The company presently expects 2012 recurring FFO in the range of $0.94 – $1.06 per share.

Duke Realty currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. We maintain our long-term ‘Neutral’ recommendation on the stock. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank (short-term ‘Hold’) for Highwoods Properties Inc (HIW - Analyst Report), one of the competitors of Duke Realty.

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