Duke Realty Posts Higher FFO, Swings to Profit

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Indianapolis-based Duke Realty Corp. (NYSE: DRE) is reporting fourth quarter core Funds From Operations of $97.3 million, compared to $76.3 million during the same quarter a year earlier. The company is also reporting full-year net income of $153 million, compared to a loss of $126.1 million in 2012. January 30, 2014

News Release

INDIANAPOLIS, Ind. - Duke Realty Corporation (NYSE: DRE), a leading industrial, suburban and medical office property REIT, today reported results for the fourth quarter and full year 2013.

Quarterly Highlights

Core Funds from Operations ("Core FFO") per diluted share was $0.29 for the quarter and $1.10 for the year. Funds from Operations ("FFO") per diluted share as defined by the National Association of Real Estate Investment Trusts ("NAREIT") was $0.28 for the quarter and $1.07 for the year.

Adjusted Funds from Operations ("AFFO") of $0.21 per diluted share for the quarter, and $0.90 for the year, which represents dividend pay-out ratios of 81 percent and 76 percent, respectively.

Strong operating momentum:

Total portfolio occupancy of 94.0 percent and in-service portfolio occupancy of 94.2 percent;

Total leasing activity of 11.2 million square feet for the quarter and 30.0 million square feet for the year;

Same-property net operating income growth of 2.3 percent and 3.7 percent, as compared to the quarter and year ended December 31, 2012, respectively.

Strong execution of capital transactions:

Completed $412 million of building dispositions for the quarter and $877 million for the full year;

Monetized $66 million of the company's land bank for the quarter and $114 million for the year, through land sales and development projects. Land sales totaled $19 million for the quarter and $52 million for the year;

Began $362 million of new developments for the quarter and $666 million for the year;

Completed $73 million of modern bulk industrial acquisitions for the quarter and $546 million of primarily bulk industrial acquisitions for the year;

Refinanced $250 million of unsecured bonds during the fourth quarter, which had an effective rate of 6.3 percent, with a $250 million new issuance of unsecured bonds with a 3.875 percent coupon due 2021. For the full year 2013, refinanced $675 million of higher rate unsecured bonds and repaid $169 million of principal on secured loans.

Commenting on the company's results for the quarter, Dennis D. Oklak, Chairman and Chief Executive Officer, stated: "We finished 2013 with an excellent fourth quarter, from both a strategic and operational perspective. We continued to improve on our operational performance, finishing the quarter with in-service portfolio occupancy of 94.2 percent and recording over 11 million square feet of leasing volume during the quarter. We achieved a tenant retention rate of 91 percent for the quarter with an overall positive renewal rental rate growth of 5.1 percent. Also, for the full year, we increased annual Core FFO per share by nearly eight percent and annual AFFO per share by nearly 10 percent from 2012."

Financial Performance

Core FFO per share of $0.29 for the fourth quarter of 2013 increased from $0.27 in the fourth quarter of 2012 because of improved rental operations, lower preferred dividends resulting from preferred share redemptions and lower interest expense resulting from the refinancing of unsecured debt at lower rates during the past year. Core FFO per share of $1.10 for the full year 2013 increased from $1.02 in 2012 due to the same factors driving quarterly results as well as increased income from service operations.

Net income was $0.21 per diluted share for the fourth quarter of 2013 compared to a net loss of $0.12 per diluted share for the same quarter in 2012. Net income was $0.47 per diluted share for the full year 2013 compared to a net loss of $0.48 per diluted share in 2012. In addition to the above-mentioned factors driving Core FFO and FFO as defined by NAREIT, net income per share for both the fourth quarter and the full year increased as the result of significant gains on depreciable property sales, including our share of gains on property sales within unconsolidated joint ventures, partially offset by increased depreciation expense due to carrying a higher overall asset base.

Portfolio Operating Performance

Strong overall operating performance across all product types:

In-service occupancy in the bulk distribution portfolio of 95.3 percent on December 31, 2013 compared to 94.6 percent on both September 30, 2013 and December 31, 2012.

In-service occupancy in the suburban office portfolio of 87.8 percent on December 31, 2013 compared to 87.2 percent on September 30, 2013 and 86.3 percent on December 31, 2012.

In-service occupancy in the medical office portfolio of 93.7 percent on December 31, 2013 compared to 93.6 percent on September 30, 2013 and 91.4 percent on December 31, 2012.

Same-property net operating income growth of 3.7 percent for the twelve months ended December 31, 2013 and 2.3 percent for the three months ended December 31, 2013 as compared to the comparable periods ended December 31, 2012. The positive same-property performance resulted from increased occupancy, across all product types as well as rental rate growth within the portfolio.

Tenant retention of 91 percent for the quarter, and over 70 percent for the year, with overall positive renewal rental rate growth of 5.1 percent for the quarter and 3.1 percent for the year.

Real Estate Investment Activity

Acquisitions

The Company acquired two high-quality modern bulk industrial facilities (1.2 million square feet in total) located in key distribution markets for $73 million during the fourth quarter of 2013. The acquisitions consisted of one industrial property totaling 965,000 square feet in Chicago and one industrial property totaling 226,000 square feet in Miami, both of which were 100 percent leased.

Development

Oklak stated, "We recorded one of our strongest quarters ever of new development activity as we commenced $362 million of highly pre-leased bulk distribution and medical office projects during the fourth quarter. In total, when including two 50 percent-owned joint venture development projects, we had 6.1 million square feet of development in progress at year-end across 24 projects, which were 89 percent pre-leased in the aggregate, with total budgeted costs of $611 million and a projected initial stabilized cash yield of 7.7 percent."

The fourth quarter included the following development activity:

Wholly-Owned Properties

During the quarter, six new industrial developments were started, which were comprised of five 100 percent leased build-to-suit projects and one speculative project. The build-to-suit projects consisted of a previously announced one million square foot development in Baltimore, Maryland, leased to Amazon; two developments in Atlanta, one leased to Federal Express and one to HH Gregg, totaling 480,000 square feet; a 300,000 square foot development in Minneapolis leased to Ruan Transportation Management Systems; a 218,000 square foot expansion of an existing industrial property in Indianapolis leased to Hachette Books. The speculative project is a 494,000 square foot development, in Linden, New Jersey.

Three new medical office developments were also started during the quarter. The Company started an 86,000 square foot development in Indianapolis, which was 72 percent pre-leased; a 57,000 square foot development in North Bergen, New Jersey, which was 70 percent pre-leased; and a 53,000 square foot development in Memphis, which was 100 percent pre-leased.

Wholly-owned development projects under construction at December 31, 2013 consisted of 11 medical office projects totaling 590,000 square feet, eight industrial projects tota