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Duke Realty Corp.’s (DRE - Analyst Report) fourth quarter 2012 core FFO (funds from operations) of 27 cents per share was in line with the Zacks Consensus Estimate but fell 3 cents from the prior-year quarter.
The decrease in year-over-year FFO at this real estate investment trust (REIT) reflects reduced income from service operations that were driven by lower third party construction fees. In addition, short-term dilution effect arising out of the repositioning moves further added to its woes.
For full year 2012, Duke Realty reported core FFO of $1.02 per share, a penny ahead of the Zacks Consensus Estimate, but below the prior-year core FFO of $1.15 per share.
Including certain one-time items, Duke Realty’s reported FFO per share came in at 25 cents in fourth quarter 2012, marginally up from 24 cents earned in the prior-year quarter. On a similar basis, full year 2012 FFO per share decreased to 98 cents from $1.07 reported a year ago.
Total revenue during fourth quarter 2012 was $269.6 million, down 11.1% from the prior-year period. However, it came well ahead of the Zacks Consensus Estimate of $210 million. For full year 2012, total revenue decreased 12.3% year over year to $1.1 billion but was ahead of the Zacks Consensus Estimate of $813 million.
Behind the Headline Numbers
Overall portfolio occupancy of Duke Realty remained relatively high at 93.0% at year-end 2012, up 50 basis points (bps) from Sep 30, 2012 and 230 bps from year-end 2011. By segments, in-service occupancy in the bulk distribution portfolio was 94.6%, while that in medical office and suburban office portfolio was 91.3% and 86.3%, respectively, at year-end 2012.
Tenant retention was 84.6% for the quarter and 83.0% for year-end 2012. For the reported quarter, same-store net operating income (NOI) of the overall portfolio advanced 1.6% year over year. For full year 2012, same property NOI increased 2.5% from a year ago.
Portfolio Restructuring Activity
In accordance with its asset repositioning strategy, Duke Realty sold non-strategic assets during the quarter. This generated proceeds of $24.3 million, which came from a non-core suburban office building ($4.6 million), and a portfolio of non-core industrial assets ($19.7 million).
During the reported quarter, Duke Realty acquired more than $448 million of industrial and medical office assets, resulting in $800 million worth of total acquisitions for the year. The company commenced development of 1 bulk industrial facility in greater Seattle, Wash. (spanning 1.02 million square feet and 100% pre-leased); and 3 medical office buildings (aggregating 126,000 square feet and 100% pre-leased).
As of Dec 31, 2012, Duke Realty had 6 industrial projects (2.5 million square feet), 9 medical office projects (610,000 square feet) and 2 suburban office buildings (502,000 square feet) under various stages of construction. These projects were 83.8% pre-leased in the aggregate.
Moreover, Duke Realty had 2 joint venture development projects under construction as of Dec 31, 2012. This included a 100% pre-leased medical office project spanning 274,000 square foot, and a speculative bulk industrial facility totaling 600,000 square foot.
As of Dec 31, 2012, Duke Realty owned and operated more than 145 million rentable square feet of industrial and office, including medical office, space in 18 major U.S. cities. On a net operating income basis, Duke Realty’s portfolio mix comprised 54% industrial, 30% office, 13% medical office and 3% retail.
Duke Realty maintains a balanced and flexible balance sheet with ample liquidity that enables it to capitalize on potential acquisition opportunities to fuel its top-line growth.
During 2012, the company generated net proceeds of $315 million from an at-the-market (ATM) equity program, refinanced $600 million in unsecured debt and redeemed 6.95% Series M Preferred Shares worth $168 million. At the end of fourth quarter 2012, the company had nearly $34 million of cash.
Furthermore, in Jan 2013, the company raised net proceeds of $572 million from a 41.4 million common equity offering to help lower its leverage and improve coverage ratios.
Management at Duke Realty remains optimistic about the company’s performance in 2013. For full year 2013, core FFO is projected to range from $1.03 – $1.11 per share and reflects expectations of a sustained solid occupancy performance, growth in same property NOI, benefit from asset repositioning measures and a strong year in development starts.
Duke Realty also remains committed to enhancing investors’ wealth through dividend payout. It declared a quarterly cash dividend of 17 cents per share on its common stock. The dividend will be paid on Feb 28, 2013, to shareholders of record as of Feb 13.
We believe that though the short-term revenue headwinds remain a concern, over the long-term, Duke Realty’s repositioning of its portfolio to focus on markets in which it already has a strong presence, will boost its top-line growth. In addition, the company has a relatively healthy balance sheet with adequate liquidity to repay debt.
Yet, its large development pipeline increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays, and lease-up risk.
Duke Realty currently holds a Zacks Rank #3 (Hold). Other REITs that are performing better and are worth a look include Ventas Inc. (VTR - Analyst Report), Simon Property Group Inc. (SPG - Analyst Report) and Brandywine Realty Trust (BDN - Snapshot Report), all carrying a Zacks Rank #2.
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.