Duke Realty Reports in Sync

Duke Realty Corp. ( DRE - Analyst Report ) , a real estate investment trust (REIT), reported third quarter 2012 FFO (funds from operations) of $71.2 million or 26 cents per share compared with $72.3 million or 27 cents in the year-ago quarter. The decrease in year-over-year FFO was primarily due to lower property portfolio income resulting from asset restructuring initiatives.

Excluding certain one-time items, recurring FFO for the quarter was $72.0 million or 26 cents per share compared with $76.1 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 revenues during third quarter 2012 were $302.9 million compared with $312.3 million in the prior-year period. Overall portfolio occupancy of the company remained relatively high at 92.5% in the reported quarter. By segments, in-service occupancy in the bulk distribution portfolio was 94.0%, while that in medical office and suburban office portfolio was 91.9% and 86.1%, respectively.

Tenant retention for the quarter was about 90.1% with rental growth of 1.0%. Same-store net operating income (NOI) for the overall portfolio increased 2.0% during the quarter driven by solid lease-up of assets and modest rental growth. The company completed 7.4 million square feet of leases during third 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 $34 million. Out of this, $9.4 million came from two industrial assets (12% occupied), $9.3 million from a joint venture medical office property (fully occupied), $8 million from two office assets (73% occupied), and the remainder from undeveloped land.

At the same time, the company acquired a medical office portfolio of seven buildings spanning 334,000 square feet for $92 million. Subsequent to the quarter-end, Duke Realty acquired 14 medical office properties for $342 million, including the assumption of $60 million of secured debt. The geographically diversified portfolio (totaling over 1.2 million square feet) was 89.4% leased.

The company started three new industrial projects during the quarter. This included two 100% pre-leased expansion projects (totaling 582,000 square feet) in Columbus and Chicago, and a 600,000 square foot bulk distribution facility in Indianapolis. Duke Realty also started three 100% pre-leased medical office projects (totaling 181,000 square feet) in Atlanta, Cincinnati, and Indianapolis, along with a 158,000 square foot suburban office project in Houston.

Presently, Duke Realty has seven medical office projects (537,000 square feet), six industrial projects (2.5 million square feet), and two office projects (502,000 square feet) under various stages of construction. These projects were 83 percent pre-leased in the aggregate. As of September 30, 2012, Duke Realty had three joint venture development projects under construction, which consisted of two industrial projects totaling 976,000 square feet and a medical office project totaling 274,000 square feet.

The company issued 5.8 million shares during the reported quarter, generating net proceeds of approximately $85 million. At the end of third quarter 2012, the company had nearly $113 million of cash with no balance on its line of credit. Duke Realty narrowed its recurring FFO guidance for 2012 to $1.00 – $1.04 from the earlier range of $0.98 – $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 rating) 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.