Duke Realty FFO In Line, Revs Beat - Analyst Blog

Duke Realty Corp. DRE reported first-quarter 2014 core funds from operations (FFO) per share of 28 cents, in line with the Zacks Consensus Estimate. The results compared favorably with the prior-year quarter figure of 26 cents.

The performance of this real estate investment trust (REIT) was aided by a rise in revenues, partly offset by higher expenses.

Total revenue for first-quarter 2014 was $293.2 million, which rose 14.0% year over year and beat the Zacks Consensus Estimate of $222.0 million. Total expenses for the quarter were $228.1 million, up 14.5% year over year.

Net income attributable to common shareholders in the quarter declined significantly to $18.7 million.

Quarter in Detail

In the first quarter, same-property net operating income increased 2.2% from the year-ago period. This was aided by occupancy and rental rate hikes. However, same property net operating income growth for the quarter suffered due to expenses related to snow removal and utility costs.

Duke Realty leased around 6.1 million square feet of space. In the reported quarter, tenant retention was about 65% and the company experienced overall impressive renewal rental rate growth of 7.9%. In the year-ago quarter, tenant retention was approximately 49% and overall positive rental rate growth was 1.9%. Overall, portfolio occupancy was 93.6%, up from 91.8% in the prior-year quarter.

As of Mar 31, 2014, in-service portfolio occupancy rose to 94.0% from 92.1% as of Mar 31, 2013. By segment, in-service occupancy in the bulk distribution portfolio was 95.0% (up 140 bps year over year) while in the medical office and suburban office portfolios, it was 93.7% (up 280 bps) and 88.1% (up 360 bps), respectively, at the quarter-end.

Notable Developments and Redevelopments

In first-quarter 2014, five wholly-owned new developments were initiated. Duke Realty initiated industrial development in Baltimore, MD (346,000 square feet), Columbus, OH (744,000 square feet) and expanded an industrial development in Atlanta, GA (257,000 square feet). It also began two speculative industrial developments in Houston, TX (combined 473,000 square feet).

As of Mar 2014, Duke Realty's joint venture development projects under construction comprised two industrial projects, which were 100% pre-leased (totaling nearly 1.8 million square feet).

Acquisitions and Dispositions in Q1

During the reported quarter, Duke Realty acquired an Atlanta-based 407,000 square-foot high-quality modern bulk industrial facility for $18.0 million. This property is fully leased.

Additionally, Duke Realty made dispositions worth $79 million in first-quarter 2014. This included divestiture of two medical office assets, a nine-building portfolio of flex-industrial assets in Indianapolis, a 20%-owned suburban office property and seven acres of undeveloped land.

Liquidity

Duke Realty exited the quarter with $19.5 million of cash, compared with $307.2 million as of Mar 31, 2013.

Outlook

The company provided its guidance for 2014. Core FFO per share is expected in the range of $1.12 to $1.18 per share. The Zacks Consensus Estimate for 2014 FFO per share of $1.15 also lies within this range.

Dividend Update

Duke Realty declared a quarterly cash dividend of 17 cents per share on its common stock. The first-quarter dividend will be paid on May 30, 2014 to shareholders of record as of May 15.

Our Take

We expect Duke Realty's enhanced operating portfolio performance and portfolio enhancement activity to drive growth. Moreover, the company's focus on key markets will likely help to boost its top line.

At present, Duke Realty has a Zacks Rank #2 (Buy). Some better-ranked stocks in the REIT-Equity Trust – Other industry include The GEO Group, Inc. GEO, Sotherly Hotels Inc. SOHO and W. P. Carey Inc. WPC. All of these carry a Zacks Rank #1 (Strong Buy).

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.