Duke Realty Corp. (DRE - Analyst Report), a real estate investment trust (REIT), reported second quarter 2012 FFO (funds from operations) of $69.4 million or 25 cents per share compared with $75.8 million or 29 cents in the year-ago quarter. The decrease in year-over-year FFO was primarily due to acquisition-related costs.
Excluding certain one-time items, recurring FFO for the quarter was $70.5 million or 26 cents per share compared with $76.4 million or 29 cents in the year-earlier quarter. The recurring FFO per share for the reported quarter was in line with the Zacks Consensus Estimate.
Total revenue during second quarter 2012 was $268.6 million compared with $315.4 million in the prior-year period. Overall portfolio occupancy of the company remained relatively high at 92.2% in the reported quarter. By segments, in-service occupancy in the bulk distribution portfolio was 93.6%, while that in medical office and suburban office portfolio was 90.7% and 85.9%, respectively.
Tenant retention for the quarter was about 66.0% with rental growth of 0.6%. Same-store net operating income (NOI) for the overall portfolio increased 3.4% during the quarter driven by solid lease-up of assets and modest rental growth. The company completed 4.9 million square feet of leases during second quarter 2012.
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, generating proceeds of $27 million, of which $15 million came from three industrial assets (86% occupied), $11 million from one retail asset, and the remainder from undeveloped land.
At the same time, the company acquired industrial facilities spanning 1.3 million square feet, worth $103 million in strategic markets during the second quarter of 2012. These included 100% leased properties, the first a 498,000 square foot bulk industrial facility in La Mirada, California; another 570,000 square foot bulk industrial building in Atlanta, Georgia; and a 257,000 square foot bulk industrial facility in Chicago, Illinois.
The company entered into $128 million worth of new development starts during the quarter. Presently, Duke Realty has 13 projects underway spanning 3.4 million square feet at an estimated investment of $459 million.
As of June 30, 2012, Duke Realty had two joint venture development projects under construction, which consisted of one industrial project totaling 376,000 square feet and one medical office project totaling 274,000 square feet.
The company issued 311,000 shares during the reported quarter, generating net proceeds of approximately $4.4 million. Subsequent to the quarter-end, Duke Realty also issued over 2 million shares generating net proceeds of approximately $28.9 million.
At the end of second quarter 2012, the company had nearly $107 million of cash with no balance on its line of credit. Duke Realty narrowed its recurring FFO guidance for 2012 to 0.98 – $1.06 from the earlier range of $0.94 – $1.06 per share.
Duke Realty currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain our long-term Neutral recommendation on the stock. We also have a Neutral recommendation and a Zacks #3 Rank for Highwoods Properties Inc. (HIW - Analyst Report), one of the competitors of Duke Realty.
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.