Duke Realty Reports First Quarter 2014 Results

INDIANAPOLIS, IN--(Marketwired - Apr 30, 2014) - Duke Realty Corporation (NYSE: DRE), a leading industrial, suburban and medical office property REIT, today reported results for the first quarter of 2014.

Quarterly Highlights

• Core Funds from Operations ("Core FFO") per diluted share was $0.28 for the quarter. Funds from Operations ("FFO") per diluted share as defined by the National Association of Real Estate Investment Trusts ("NAREIT") was also $0.28 for the quarter. 
• Operating results:
  • Total portfolio occupancy of 93.6 percent and in-service portfolio occupancy of 94.0 percent;
  • Total leasing activity of 6.1 million square feet;
  • Same-property net operating income growth of 2.2 percent as compared to the quarter ended March 31, 2013 and 3.0 percent as compared to the twelve months ended March 31, 2013;
  • Adjusted Funds from Operations ("AFFO") of $0.25 per diluted share, which represents a dividend pay-out ratio of 68 percent.
• Asset and capital activities:
  • Began $108 million of new developments;
  • Completed $79 million of non-strategic asset dispositions;
  • Completed one $18 million modern bulk industrial acquisition;
  • Repaid one secured loan, totaling $18 million that bore interest at a weighted average effective rate of 3.5 percent.

Denny Oklak, Chairman and CEO said, "We saw continued strong operational results in the first quarter and maintained a high level of occupancy. Additionally, we executed 2.0 million square feet of renewal leases during the quarter with an impressive 7.9 percent growth in net effective rent. Same property net operating income growth for the quarter was negatively affected by snow removal and utility costs from the harsh winter but we still expect annual same property net operating income growth to be within our guidance range of 2.0 percent to 4.0 percent."

Financial Performance

• The following table reconciles FFO per share, as defined by NAREIT, to Core FFO per share as measured by the company, for the three months ended March 31, 2014 and 2013:

 

			Three Months Ended March 31
			2014			2013
FFO per share - diluted, as defined by NAREIT			$	0.28		$	0.24
Adjustments:
	Adjustments for redemption/repurchase of preferred shares			-			0.02
	Gain on land sales			-			-
	Acquisition-related activity			-			-
Core FFO per share - diluted			$	0.28		$	0.26

• Core FFO for the first quarter of 2014 increased by $10 million, or $0.02 per share, from the first quarter of 2013 because of improved rental operations, lower interest expense as the result of refinancing unsecured debt at lower rates during 2013 and lower preferred dividends resulting from the redemption of the 8.375 percent Series O preferred shares in February 2013. A reconciliation of net income to FFO as defined by NAREIT, as well as to Core FFO, is included in the financial tables included in this release.

• Net income was $0.06 per diluted share for the first quarter of 2014 compared to $0.09 per diluted share for the same quarter in 2013. The lower net income per share was the result of the company recognizing nearly $49 million during the first quarter of 2013 for its share of joint ventures' gains on sales of depreciable property, which was not included in FFO.

Portfolio Operating Performance

Strong overall operating performance across all product types:

• In-service occupancy in the bulk distribution portfolio at March 31, 2014 of 95.0 percent compared to 95.3 percent at December 31, 2013.

• In-service occupancy in the suburban office portfolio of 88.1 percent at March 31, 2014 compared to 87.8 percent at December 31, 2013.

• In-service occupancy in the medical office portfolio of 93.7 percent at both March 31, 2014 and December 31, 2013.

• Tenant retention of 65 percent for the quarter, with overall renewal rental rate growth of 7.9 percent.
  

• Same-property net operating income growth of 3.0 percent for the twelve months ended March 31, 2014 and 2.2 percent for the three months ended March 31, 2014 as compared to the comparable periods ended March 31, 2013. 

Real Estate Investment Activity

Acquisitions

The company acquired one 100 percent leased 407,000 square foot high-quality modern bulk industrial facility located in Atlanta for $18 million during the first quarter of 2014. 

Development

Oklak stated, "New development activity continued to be strong as we began $108 million of bulk distribution projects during the first quarter, which will be primarily constructed on land that we already owned. Our $607 million development pipeline is 86 percent leased with an average expected initial stabilized yield of 7.6 percent. The pipeline of potential projects to start during the remainder of 2014 is also high."

The first quarter included the following development activity:

Wholly-Owned Properties

• During the quarter, five new developments were started. The company started a 346,000 square foot industrial development on our land in Baltimore, Maryland; a 744,000 square foot industrial development in Columbus, Ohio; and a 257,000 square foot expansion to an industrial development on our land in Atlanta, Georgia, all of which were 100 percent pre-leased. We also started two speculative industrial developments, totaling a combined 473,000 square feet in Houston, Texas.

• Wholly-owned development projects under construction at March 31, 2014 consisted of 13 industrial projects totaling 4.9 million square feet, eight medical office projects totaling 397,000 square feet and two suburban office projects totaling 452,000 square feet, which were 81 percent pre-leased in the aggregate.

• One 100 percent leased suburban office development totaling 200,000 square feet was placed in service. Additionally, three 100 percent pre-leased medical office projects totaling 193,000 square feet were placed in service. 

Joint Venture Properties

• Joint venture development projects under construction at March 31, 2014 consisted of two industrial projects totaling nearly 1.8 million square feet, which are 100 percent pre-leased.

Dispositions

• Proceeds from property dispositions totaled $79 million during the quarter, of which $57 million was from the sale of two medical office assets totaling 180,000 square feet (100 percent occupied) and $18 million was from the sale of a nine-building portfolio of flex-industrial assets in Indianapolis totaling 439,000 square feet (95 percent occupied). The remaining proceeds were from our share of the sale of a 20 percent-owned suburban office property as well as from the sale of seven acres of undeveloped land. 

Dividends Declared

Our board of directors declared a quarterly cash dividend on our common stock of $0.17 per share, or $0.68 per share on an annualized basis. The first quarter dividend will be payable May 30, 2014 to shareholders of record on May 15, 2014. The board also declared the following dividends on our outstanding preferred stock:

Class		NYSE Symbol		Quarterly Amount/Share		Record Date		Payment Date
Series J		DREPRJ		$0.4140625		May 15, 2014		May 30, 2014
Series K		DREPRK		$0.40625		May 15, 2014		May 30, 2014
Series L		DREPRL		$0.4125		May 15, 2014		May 30, 2014

2014 Earnings Guidance

The company revised its previous Core FFO guidance for 2014 to a range of $1.12 to $1.18 per share, compared to previous guidance of $1.11 to $1.19 per share.

FFO and AFFO Reporting Definitions

FFO: FFO is computed in accordance with standards established by NAREIT. NAREIT defines FFO as net income (loss) excluding gains (losses) on sales of depreciable property, impairment charges related to depreciable real estate assets, and extraordinary items (computed in accordance with generally accepted accounting principles ("GAAP")); plus real estate related depreciation and amortization, and after similar adjustments for unconsolidated joint ventures. The company believes FFO to be most directly comparable to net income as defined by GAAP. The company believes that FFO should be examined in conjunction with net income (as defined by GAAP) as presented in the financial statements accompanying this release. FFO does not represent a measure of liquidity, nor is it indicative of funds available for the company's cash needs, including the company's ability to make cash distributions to shareholders.

Core FFO: Core FFO is computed as FFO adjusted for certain items that are generally non-cash in nature and that materially distort the comparative measurement of company performance over time. The adjustments include gains on sale of undeveloped land, impairment charges not related to depreciable real estate assets, tax expenses or benefit related to (i) changes in deferred tax asset valuation allowances, (ii) changes in tax exposure accruals that were established as the result of the adoption of new accounting principles, or (iii) taxable income (loss) related to other items excluded from FFO or Core FFO (collectively referred to as "other income tax items"), gains (losses) on debt transactions, adjustments on the repurchase or redemption of preferred stock, gains (losses) on and related costs of acquisitions, and severance charges related to major overhead restructuring activities. Although the company's calculation of Core FFO differs from NAREIT's definition of FFO and may not be comparable to that of other REITs and real estate companies, the company believes it provides a meaningful supplemental measure of its operating performance.

AFFO: AFFO is defined by the company as Core FFO (as defined above), less recurring building improvements and total second generation capital expenditures (the leasing of vacant space that had previously been under lease by the company is referred to as second generation lease activity) related to leases commencing during the reporting period and adjusted for certain non-cash items including straight line rental income and expense, non-cash components of interest expense and stock compensation expense, and after similar adjustments for unconsolidated partnerships and joint ventures.

Same Property Performance

The company includes same-property net operating income growth as a property-level supplemental measure of performance. The company utilizes same-property net income growth as a supplemental measure to evaluate property-level performance, and jointly-controlled properties are included at our ownership percentage.

A description of the properties that are excluded from the company's same-property measure is included on page 22 of our March 31, 2014 supplemental information.

About Duke Realty Corporation

Duke Realty Corporation owns and operates approximately 154.1 million rentable square feet of industrial and office assets, including medical office, in 22 major U.S. metropolitan areas. Duke Realty Corporation is publicly traded on the NYSE under the symbol DRE and is listed on the S&P MidCap 400 Index. More information about Duke Realty Corporation is available at www.dukerealty.com.

First Quarter Earnings Call and Supplemental Information

Duke Realty Corporation is hosting a conference call tomorrow, May 1, 2014, at 3:00 p.m. EDT to discuss its first quarter operating results. All investors and other interested parties are invited to listen to the call. Access is available through the Investor Relations section of the company's website.

A copy of the company's supplemental information will be available by 6:00 p.m. EDT today through the Investor Relations section of the company's website.

Cautionary Notice Regarding Forward-Looking Statements

This news release may contain forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, including, among others, statements regarding the company's future financial position or results, future dividends, and future performance, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the company, members of its management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should," or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements. Many of these factors are beyond the company's abilities to control or predict. Such factors include, but are not limited to, (i) general adverse economic and local real estate conditions; (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; (iii) financing risks, such as the inability to obtain equity, debt or other sources of financing or refinancing on favorable terms, if at all; (iv) the company's ability to raise capital by selling its assets; (v) changes in governmental laws and regulations; (vi) the level and volatility of interest rates and foreign currency exchange rates; (vii) valuation of joint venture investments, (viii) valuation of marketable securities and other investments; (ix) valuation of real estate; (x) increases in operating costs; (xi) changes in the dividend policy for the company's common stock; (xii) the reduction in the company's income in the event of multiple lease terminations by tenants; (xiii) impairment charges, (xiv) the effects of geopolitical instability and risks such as terrorist attacks; (xv) the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes; and (xvi) the effect of any damage to our reputation resulting from developments relating to any of items (i) - (ix). Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained from time to time in the company's filings with the Securities and Exchange Commission. The company refers you to the section entitled "Risk Factors" contained in the company's Annual Report on Form 10-K for the year ended December 31, 2013. Copies of each filing may be obtained from the company or the Securities and Exchange Commission.

The risks included here are not exhaustive and undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to the company, its management, or persons acting on their behalf are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and the company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless otherwise required by law.

Duke Realty Corporation and Subsidiaries
Consolidated Statement of Operations
March 31, 2014
(Unaudited and in thousands, except per share amounts)
					Three Months Ended
					March 31,
					2014				2013
Revenues:
	Rental and related revenue				$	237,350			$	209,879
	General contractor and service fee revenue					55,820				47,404
						293,170				257,283
Expenses:
	Rental expenses					50,267				38,861
	Real estate taxes					32,467				29,040
	General contractor and other services expenses					47,271				38,341
	Depreciation and amortization					98,059				92,993
						228,064				199,235
Other operating activities:
	Equity in earnings of unconsolidated companies					2,321				49,378
	Gain on sale of properties					15,853				168
	Gain on land sales					152				-
	Undeveloped land carrying costs					(2,124	)			(2,198	)
	Other operating expenses					(92	)			(68	)
	General and administrative expenses					(14,694	)			(13,145	)
						1,416				34,135
		Operating income				66,522				92,183
Other income (expenses):
	Interest and other income, net					351				153
	Interest expense					(55,257	)			(57,181	)
	Acquisition-related activity					(14	)			643
Income from continuing operations before income taxes						11,602				35,798
	Income tax expense					(2,674	)			-
Income from continuing operations						8,928				35,798
Discontinued operations:
	Loss before gain on sales					(132	)			(629	)
	Gain on sale of depreciable properties, net of tax					16,775				8,954
			Income from discontinued operations			16,643				8,325
Net income						25,571				44,123
Dividends on preferred shares						(7,037	)			(9,550	)
Adjustments for redemption/repurchase of preferred shares						483				(5,932	)
Net income attributable to noncontrolling interests						(334	)			(598	)
		Net income attributable to common shareholders			$	18,683			$	28,043
Basic net income per common share:
	Continuing operations attributable to common shareholders				$	0.01			$	0.06
	Discontinued operations attributable to common shareholders					0.05				0.03
Total					$	0.06			$	0.09
Diluted net income per common share:
	Continuing operations attributable to common shareholders				$	0.01			$	0.06
	Discontinued operations attributable to common shareholders					0.05				0.03
Total					$	0.06			$	0.09

 

Duke Realty Corporation and Subsidiaries
Summary of EPS, FFO and AFFO
March 31, 2014
(Unaudited and in thousands, except per share amounts)
			2014									2013
			Amount				Wtd. Avg. Shares		Per Share			Amount				Wtd. Avg. Shares		Per Share
Net income attributable to common shareholders			$	18,683								$	28,043
Less: dividends on participating securities				(645	)								(688	)
Net income per common share- basic				18,038			327,106		$	0.06			27,355			314,936		$	0.09
Add back:
	Noncontrolling interest in earnings of unitholders			250			4,387						392			4,405
	Other potentially dilutive securities						223									230
Net income attributable to common shareholders- diluted			$	18,288			331,716		$	0.06		$	27,747			319,571		$	0.09
Reconciliation to funds from operations ("FFO")
Net income attributable to common shareholders			$	18,683			327,106					$	28,043			314,936
Adjustments:
	Depreciation and amortization			98,264									99,780
	Company share of joint venture depreciation and amortization			6,396									7,629
	Gains on depreciable property sales, net of tax-wholly owned, discontinued operations			(16,775	)								(8,954	)
	Gains on depreciable property sales, net of tax-wholly owned, continuing operations			(13,179	)								(168	)
	Gains/losses on depreciable property sales-JV			165									(48,814	)
	Noncontrolling interest share of adjustments			(991	)								(682	)
Funds from operations- basic				92,563			327,106		$	0.28			76,834			314,936		$	0.24
	Noncontrolling interest in income of unitholders			250			4,387						392			4,405
	Noncontrolling interest share of adjustments			991									682
	Other potentially dilutive securities						2,887									3,098
Funds from operations- diluted			$	93,804			334,380		$	0.28		$	77,908			322,439		$	0.24
	Gain on land sales			(152	)								-
	Adjustments for redemption/repurchase of preferred shares			(483	)								5,932
	Acquisition-related activity			14									(643	)
Core funds from operations- diluted			$	93,183			334,380		$	0.28		$	83,197			322,439		$	0.26
Adjusted funds from operations
Core funds from operations- diluted			$	93,183			334,380		$	0.28		$	83,197			322,439		$	0.26
Adjustments:
	Straight-line rental income and expense			(6,701	)								(5,891	)
	Amortization of above/below market rents and concessions			2,468									2,210
	Stock based compensation expense			8,277									6,854
	Noncash interest expense			1,602									2,310
	Second generation concessions			(76	)								(68	)
	Second generation tenant improvements			(7,461	)								(7,859	)
	Second generation leasing commissions			(6,902	)								(5,636	)
	Building improvements			(337	)								(634	)
Adjusted funds from operations - diluted			$	84,053			334,380		$	0.25		$	74,483			322,439		$	0.23

 

Duke Realty Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, 2014
(Unaudited and in thousands)
				March 31,				December 31,
				2014				2013
Assets:
	Rental property			$	7,096,174			$	7,031,660
	Less: accumulated depreciation				(1,422,986	)			(1,382,757	)
	Construction in progress				277,400				256,911
	Undeveloped land				570,718				590,052
		Net real estate investments			6,521,306				6,495,866
	Cash and cash equivalents				19,474				19,275
	Accounts receivable				34,883				26,664
	Straight-line rents receivable				126,387				120,497
	Receivables on construction contracts, including retentions				27,833				19,209
	Investments in and advances to unconsolidated companies				336,060				342,947
	Deferred financing costs, net				33,764				36,250
	Deferred leasing and other costs, net				462,176				473,413
	Escrow deposits and other assets				205,480				218,493
		Total assets		$	7,767,363			$	7,752,614
Liabilities and equity:
	Secured debt			$	1,077,468			$	1,100,124
	Unsecured notes				3,065,742				3,066,252
	Unsecured line of credit				180,000				88,000
	Construction payables and amounts due to subcontractors				72,695				69,391
	Accrued real estate taxes				77,301				75,396
	Accrued interest				36,468				52,824
	Other accrued expenses				52,118				68,276
	Other liabilities				138,602				142,589
	Tenant security deposits and prepaid rents				50,307				45,133
		Total liabilities			4,750,701				4,707,985
	Preferred stock				428,926				447,683
	Common stock and additional paid-in capital				4,653,199				4,624,228
	Accumulated other comprehensive income				3,832				4,119
	Distributions in excess of net income				(2,100,245	)			(2,062,787	)
		Total shareholders' equity			2,985,712				3,013,243
	Noncontrolling interest				30,950				31,386
		Total liabilities and equity		$	7,767,363			$	7,752,614