Duke Realty Reports Third Quarter 2015 Results

INDIANAPOLIS, IN--(Marketwired - Oct 28, 2015) - Duke Realty Corporation (NYSE: DRE), a leading industrial and medical office property REIT, today reported results for the third quarter of 2015.

Quarterly Highlights

• Core Funds from Operations ("Core FFO") per diluted share was $0.29 for the quarter. Funds from Operations ("FFO") per diluted share as defined by the National Association of Real Estate Investment Trusts ("NAREIT") was $0.27 for the quarter.
  
  
• Operating results:
  
  
  • Occupancy in the total portfolio, including properties under development, of 93.3 percent and in-service portfolio occupancy of 95.8 percent;
    
    
  • Same-property net operating income growth of 3.0 percent for the quarter ended September 30, 2015 as compared to the quarter ended September 30, 2014 and 5.4 percent for the twelve months ended September 30, 2015 as compared to the twelve months ended September 30, 2014;
    
    
  • Adjusted Funds from Operations ("AFFO") of $0.23 per diluted share;
    
    
  • Total leasing activity of 4.4 million square feet.
    
    
• Successful execution of capital transactions during the quarter:
  
  
  • Completed $238 million of building and land dispositions;
    
    
  • Began $110 million of new developments;
    
    
  • Continued improvement in overall leverage profile and $217 million of cash on hand at quarter end.
    
    
    

Denny Oklak, Chairman and CEO said, "The third quarter was another solid quarter of disposition activity, development starts and operational performance. In light of the continued aggressive pricing in today's investment sales market, our disposition program is still active at pricing that is overall accretive to AFFO. We are using the proceeds generated from these dispositions to fund our development projects and for further deleveraging. I am also very pleased to announce that, given our solid balance sheet position and our optimistic outlook in the ability to continue to grow AFFO per share, our board of directors today authorized a 5.9% increase, or $0.01 per share, in the regular quarterly dividend. In addition, our board of directors today declared a $0.20 per share special dividend to be paid on December 15, 2015, which is necessary to comply with minimum distribution requirements for a REIT, as a result of selling over $1.7 billion of assets year-to-date."

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 September 30, 2015 and 2014:

			Three Months Ended September 30,
			2015		2014
FFO per share, attributable to common shareholders - diluted, as defined by NAREIT			0.27		0.29
Adjustments:
	Adjustments for redemption/repurchase of preferred shares		-		0.01
		Gain on land sales	-		(0.01	)
	Impairment charges - non-depreciable Properties		0.01		0.01
		Acquisition-related activity	0.01		-
Core FFO per share, attributable to common shareholders - diluted			0.29		0.30

• Core FFO was $101 million for the third quarter of 2015, and was down $0.01 per share from the same quarter of 2014. The slight decrease in Core FFO per share was due to the impact of dispositions, partially offset by improved property performance and new developments being placed in service. 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.
  
  
• Diluted FFO, as defined by NAREIT, was $95 million for the third quarter of 2015, down $0.02 per share from the same quarter of 2014. This decrease was also due to the impact of dispositions.
  
  
• Net income was $0.22 per diluted share for the third quarter of 2015 compared to $0.18 per diluted share for the same quarter in 2014. The increase in net income per diluted share was primarily due to an increase in gains on sales of depreciable properties during the third quarter 2015.
  
  

Portfolio Operating Performance

Strong overall operating performance across all product types:

• In-service occupancy in the bulk distribution portfolio at September 30, 2015 of 96.2 percent compared to 96.3 percent at June 30, 2015.
  
  
• In-service occupancy in the medical office portfolio of 95.0 percent at September 30, 2015 compared to 94.9 percent at June 30, 2015.
  
  
• In-service occupancy in the suburban office portfolio of 89.0 percent at September 30, 2015 compared to 87.2 percent at June 30, 2015.
  
  
• Tenant retention of 75 percent for the quarter, with overall renewal rental rate growth for the entire portfolio of 12.8 percent.
  
  
• Same-property net operating income growth of 3.0 percent for the three months ended September 30, 2015 and 5.4 percent for the twelve months ended September 30, 2015 as compared to the comparable periods ended September 30, 2014.
  
  

Real Estate Investment Activity

Development

The third quarter included the following development activity:

Wholly-Owned Properties

• During the quarter, the company started $110 million of wholly-owned development projects. These projects consisted of five industrial projects totaling 841,000 square feet, which were 62 percent leased in total, and one medical office project totaling 100,000 square feet which was 49 percent leased.
  
  
• Wholly-owned development projects under construction at September 30, 2015, excluding the one suburban office project that will be sold at completion as part of the earlier suburban office portfolio disposition, consisted of nineteen industrial projects totaling 5.6 million square feet, nine medical office projects totaling 515,000 square feet and one suburban office project totaling 144,000 square feet. These projects were 42 percent pre-leased in the aggregate.
  
  
• One suburban office project, which was 100 percent leased and totaled 112,000 square feet, was placed in service.
  
  

Joint Venture Properties

• One bulk industrial project, which was 100 percent leased and totaled 93,000 square feet, was placed in service during the quarter by a 50 percent-owned joint venture.
  
  
• Joint venture development projects under construction at September 30, 2015 consisted of two industrial projects totaling 932,000 square feet, which were 76 percent pre-leased.
  
  

Dispositions

Dispositions totaled $238 million in the quarter and were comprised primarily of the following:

• A wholly-owned portfolio of 7 suburban office properties in Cincinnati, which were 85 percent leased in the aggregate and totaled 1.01 million square feet.
  
  
• A wholly-owned 1.02 million square foot, 100 percent leased bulk industrial property located in Middletown, Delaware.
  
  
• Non-strategic land across several markets, totaling 142 acres, with a sales price of $23 million.
  
  

Notice of Unsecured Debt Pre-Payment

On September 30, 2015, the company gave notice to prepay the $150 million of 5.5% senior unsecured notes due March 1, 2016. The transaction is expected to settle October 30, 2015, using cash on hand at September 30, 2015.

Distributions Declared

The board of directors announced today an increase to the regular quarterly common stock dividend from $0.17 per share to $0.18 per share, payable on November 30, 2015 to shareholders of record as of November 16, 2015. Equal to $0.72 per share on an annualized basis, the new dividend provides a 5.9 percent increase over the previous amount.

In addition, the board of directors declared a special cash dividend of $0.20 per common share payable on December 15, 2015 to shareholders of record as of November 16, 2015. The decision to declare a special dividend was primarily a result of the sale of approximately $1.71 billion of assets through September 30, 2015.

2015 Guidance

The following assumptions within the detailed guidance, which is available through the Investor Relations-Financials section of the company's website, were revised:

• The company narrowed and increased the mid-point of its previous Core FFO guidance for 2015 to a range of $1.15 to $1.19 per share, compared to previous guidance of $1.13 to $1.19 per share.
  
  
• The estimate for AFFO was narrowed to a range of $1.00 to $1.02 per share, compared to previous range of $0.98 to $1.04 per share.
  
  
• The estimate for land disposition proceeds was increased to a range of $100 million to $130 million from a range of $80 million to $120 million.
  
  
• The estimate for property acquisitions was decreased to a range of $25 million to $50 million from a range of $75 million to $150 million.
  
  

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 charges related to major overhead restructuring activities, including severance. 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 20 of our September 30, 2015 supplemental information.

About Duke Realty Corporation

Duke Realty Corporation owns and operates 141 million rentable square feet of industrial and medical office assets 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.

Third Quarter Earnings Call and Supplemental Information

Duke Realty Corporation is hosting a conference call tomorrow, October 29, 2015, at 3:00 p.m. ET to discuss its third 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. ET 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, 2014. 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 Balance Sheets
(Unaudited and in thousands)
				September 30,				December 31,
				2015				2014
	Assets
Real estate investments:
	Land and improvements			$	1,371,457			$	1,412,867
	Buildings and tenant improvements				4,758,794				4,986,390
	Construction in progress				337,173				246,062
	Investments in and advances to unconsolidated companies				276,926				293,650
	Undeveloped land				435,519				499,960
					7,179,869				7,438,929
	Accumulated depreciation				(1,202,585	)			(1,235,337	)
		Net real estate investments			5,977,284				6,203,592
Real estate investments and other assets held-for-sale					8,920				725,051
Cash and cash equivalents					175,874				17,922
Accounts receivable, net					20,985				26,168
Straight-line rents receivable, net					116,639				109,657
Receivables on construction contracts, including retentions					24,822				36,224
Deferred financing costs, net					30,428				38,734
Deferred leasing and other costs, net					359,652				387,635
Escrow deposits and other assets					425,305				209,856
				$	7,139,909			$	7,754,839
	Liabilities and Equity
Indebtedness:
	Secured debt			$	764,707			$	942,478
	Unsecured debt				2,681,313				3,364,161
	Unsecured line of credit				-				106,000
					3,446,020				4,412,639
Liabilities related to real estate investments held-for-sale					225				59,092
Construction payables and amounts due subcontractors, including retentions					66,709				69,470
Accrued real estate taxes					91,252				76,308
Accrued interest					31,330				55,110
Other accrued expenses					42,489				62,632
Other liabilities					110,611				95,566
Tenant security deposits and prepaid rents					39,830				44,142
	Total liabilities				3,828,466				4,874,959
Shareholders' equity:
	Common stock				3,453				3,441
	Additional paid-in-capital				4,959,060				4,944,800
	Accumulated other comprehensive income				2,066				3,026
	Distributions in excess of net income				(1,677,314	)			(2,090,942	)
		Total shareholders' equity			3,287,265				2,860,325
Noncontrolling interest					24,178				19,555
	Total equity				3,311,443				2,879,880
				$	7,139,909			$	7,754,839

Duke Realty Corporation and Subsidiaries
Consolidated Statement of Operations
(Unaudited and in thousands, except per share amounts)
				Three Months Ended								Nine Months Ended
				September 30,								September 30,
				2015				2014				2015				2014
Revenues:
	Rental and related revenue			$	200,938			$	202,067			$	617,549			$	615,493
	General contractor and service fee revenue				33,599				59,739				110,320				185,072
					234,537				261,806				727,869				800,565
Expenses:
	Rental expenses				30,137				29,829				96,355				104,090
	Real estate taxes				27,702				29,501				86,228				87,355
	General contractor and other services expenses				29,694				52,528				98,455				163,657
	Depreciation and amortization				79,898				85,772				240,135				262,570
					167,431				197,630				521,173				617,672
Other operating activities:
	Equity in earnings (loss) of unconsolidated companies				(5,088	)			19,178				16,281				82,325
	Gain on sale of properties				71,259				47,143				202,153				133,617
	Gain on land sales				1,659				3,167				24,096				7,208
	Other operating expenses				(1,467	)			(1,829	)			(4,579	)			(6,032	)
	Impairment charges				(2,426	)			(6,368	)			(7,896	)			(8,891	)
	General and administrative expenses				(11,340	)			(10,573	)			(47,582	)			(35,632	)
					52,597				50,718				182,473				172,595
		Operating income			119,703				114,894				389,169				355,488
Other income (expenses):
	Interest and other income, net				1,343				356				3,056				936
	Interest expense				(41,615	)			(47,421	)			(134,576	)			(145,628	)
	Gain (loss) on debt extinguishment				64				-				(82,589	)			(139	)
	Acquisition-related activity				(5,660	)			(110	)			(6,993	)			(871	)
Income from continuing operations, before income taxes					73,835				67,719				168,067				209,786
	Income tax benefit (expense)				3,305				442				4,109				(2,595	)
		Income from continuing operations			77,140				68,161				172,176				207,191
Discontinued operations:
	Income (loss) before gain on sales				(43	)			2,277				10,546				6,569
	Gain on sale of depreciable properties, net of tax				111				1,119				414,620				19,895
		Income from discontinued operations			68				3,396				425,166				26,464
Net income					77,208				71,557				597,342				233,655
Dividends on preferred shares					-				(6,072	)			-				(20,155	)
Adjustments for redemption/repurchase of preferred shares					-				(3,196	)			-				(2,713	)
Net income attributable to noncontrolling interests					(774	)			(756	)			(6,284	)			(2,883	)
		Net income attributable to common shareholders		$	76,434			$	61,533			$	591,058			$	207,904
Basic net income per common share:
	Continuing operations attributable to common shareholders			$	0.22			$	0.17			$	0.49			$	0.54
	Discontinued operations attributable to common shareholders				0.00				0.01				1.22				0.08
Total				$	0.22			$	0.18			$	1.71			$	0.62
Diluted net income per common share:
	Continuing operations attributable to common shareholders			$	0.22			$	0.17			$	0.49			$	0.54
	Discontinued operations attributable to common shareholders				0.00				0.01				1.21				0.08
Total				$	0.22			$	0.18			$	1.70			$	0.62

Duke Realty Corporation and Subsidiaries
Summary of EPS, FFO and AFFO
Three Months Ended September 30
(Unaudited and in thousands, except per share amounts)
			2015									2014
							Wtd.									Wtd.
							Avg.		Per							Avg.		Per
			Amount				Shares		Share			Amount				Shares		Share
Net income attributable to common shareholders			$	76,434								$	61,533
Less: dividends on participating securities				(593	)								(651	)
Net income per common share- basic				75,841			345,256		$	0.22			60,882			341,165		$	0.18
Add back:
	Noncontrolling interest in earnings of unitholders			751			3,504						795			4,380
	Other potentially dilutive securities			593			3,390									281
Net income attributable to common shareholders- diluted			$	77,185			352,150		$	0.22		$	61,677			345,826		$	0.18
Reconciliation to funds from operations ("FFO")
Net income attributable to common shareholders			$	76,434			345,256					$	61,533			341,165
Adjustments:
	Depreciation and amortization			79,898									95,000
	Company share of joint venture depreciation, amortization and other			12,501									7,827
	Impairment charges - depreciable property			-									453
	Gains on depreciable property sales - wholly owned, discontinued operations			(66	)								(564	)
	Gains on depreciable property sales - wholly owned, continuing operations			(71,259	)								(47,143	)
	Income tax benefit triggered by depreciable property sales			(3,350	)								(997	)
	Gains on depreciable property sales - JV			(189	)								(17,370	)
	Noncontrolling interest share of adjustments			(176	)								(475	)
NAREIT FFO attributable to common shareholders - basic				93,793			345,256		$	0.27			98,264			341,165		$	0.29
	Noncontrolling interest in income of unitholders			751			3,504						795			4,380
	Noncontrolling interest share of adjustments			176									475
	Other potentially dilutive securities						3,390									3,357
NAREIT FFO attributable to common shareholders - diluted			$	94,720			352,150		$	0.27		$	99,534			348,902		$	0.29
	Gain on land sales			(1,659	)								(3,167	)
	Adjustments for redemption of preferred shares			-									3,196
	Gain on debt extinguishment			(64	)								-
	Impairment charges - non-depreciable properties			2,426									5,915
	Overhead restructuring charges			215									-
	Acquisition-related activity			5,660									110
Core FFO attributable to common shareholders - diluted			$	101,298			352,150		$	0.29		$	105,588			348,902		$	0.30
Adjusted FFO
Core FFO - diluted			$	101,298			352,150		$	0.29		$	105,588			348,902		$	0.30
Adjustments:
	Straight-line rental income and expense			(5,820	)								(5,848	)
	Amortization of above/below market rents and concessions			280									1,221
	Stock based compensation expense			1,730									2,140
	Noncash interest expense			1,831									1,998
	Second generation concessions			(8	)								(10	)
	Second generation tenant improvements			(9,791	)								(5,919	)
	Second generation leasing commissions			(5,962	)								(6,357	)
	Building improvements			(2,152	)								(3,279	)
Adjusted FFO - diluted			$	81,406			352,150		$	0.23		$	89,534			348,902		$	0.26

Duke Realty Corporation and Subsidiaries
Summary of EPS, FFO and AFFO
Nine Months Ended September 30
(Unaudited and in thousands, except per share amounts)
			2015									2014
							Wtd.									Wtd.
							Avg.		Per							Avg.		Per
			Amount				Shares		Share			Amount				Shares		Share
Net income attributable to common shareholders			$	591,058								$	207,904
Less: dividends on participating securities				(1,803	)								(1,941	)
Net income per common share- basic				589,255			344,986		$	1.71			205,963			333,393		$	0.62
Add back:
	Noncontrolling interest in earnings of unitholders			6,212			3,609						2,738			4,384
	Other potentially dilutive securities			1,803			3,418									280
Net income attributable to common shareholders- diluted			$	597,270			352,013		$	1.70		$	208,701			338,057		$	0.62
Reconciliation to funds from operations ("FFO")
Net income attributable to common shareholders			$	591,058			344,986					$	207,904			333,393
Adjustments:
	Depreciation and amortization			243,652									290,905
	Company share of joint venture depreciation, amortization and other			22,247									21,004
	Impairment charges - depreciable property			864									453
	Gains on depreciable property sales - wholly owned, discontinued operations			(417,795	)								(22,864	)
	Gains on depreciable property sales - wholly owned, continuing operations			(202,153	)								(133,617	)
	Income tax (benefit) expense triggered by depreciable property sales			(934	)								5,564
	Gains on depreciable property sales-JV			(13,722	)								(75,652	)
	Noncontrolling interest share of adjustments			3,808									(1,114	)
NAREIT FFO attributable to common shareholders - basic				227,025			344,986		$	0.66			292,583			333,393		$	0.88
	Noncontrolling interest in income of unitholders			6,212			3,609						2,738			4,384
	Noncontrolling interest share of adjustments			(3,808	)								1,114
	Other potentially dilutive securities						3,418									3,274
NAREIT FFO attributable to common shareholders - diluted			$	229,429			352,013		$	0.65		$	296,435			341,051		$	0.87
	Gain on land sales			(24,096	)								(7,208	)
	Loss on debt extinguishment			82,589									139
	Adjustments for redemption/repurchase of preferred shares			-									2,713
	Impairment charges - non-depreciable properties			7,032									8,438
	Overhead restructuring Charges			7,422									-
	Acquisition-related activity			6,993									871
Core FFO attributable to common shareholders - diluted			$	309,369			352,013		$	0.88		$	301,388			341,051		$	0.88
Adjusted FFO
Core FFO - diluted			$	309,369			352,013		$	0.88		$	301,388			341,051		$	0.88
Adjustments:
	Straight-line rental income and expense			(19,085	)								(17,921	)
	Amortization of above/below market rents and concessions			2,961									5,379
	Stock based compensation expense			15,334									13,606
	Noncash interest expense			5,353									5,049
	Second generation concessions			(56	)								(86	)
	Second generation tenant improvements			(21,682	)								(23,803	)
	Second generation leasing commissions			(16,988	)								(21,974	)
	Building improvements			(4,539	)								(4,740	)
Adjusted FFO - diluted			$	270,667			352,013		$	0.77		$	256,898			341,051		$	0.75