Duke Realty FFO, Profit Increase

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Indianapolis-based Duke Realty Corp. (NYSE: DRE) is reporting third quarter 2014 core funds from operations of $106 million, compared to $94.2 million during the same period the previous year. The company is also reporting net income of $61.5 million for the quarter, compared to a loss of $6.1 million in 2013.

November 2, 2014

News Release

Indianapolis, Ind. -- Duke Realty Corporation (NYSE: DRE), a leading industrial, suburban office and medical office property REIT, today reported results for the third quarter of 2014.

Quarterly Highlights

Core Funds from Operations ("Core FFO") was $106 million, or $0.30 per diluted share, for the quarter. Funds from Operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), was approximately $100 million, or $0.29 per diluted share, for the quarter.

Operating results:

In-service portfolio occupancy of 95.4 percent and total portfolio occupancy of 93.5 percent;

Total leasing activity of 5.9 million square feet;

Same-property net operating income growth of 6.0 percent as compared to the quarter ended September 30, 2013 and 3.8 percent as compared to the twelve months ended September 30, 2013;

Adjusted Funds from Operations ("AFFO") of $0.26 per diluted share, which represents a dividend payout ratio of 65 percent.

Asset and capital activities:

Started $100 million of new developments;

Placed in service six 100 percent leased industrial developments, three 100 percent leased medical office developments and one 74 percent leased suburban office development;

Completed more than $175 million of non-strategic primarily suburban office building dispositions and more than $9 million of land dispositions;

Redeemed all remaining 6.625 percent Series J Cumulative Redeemable Preferred Shares for $96 million.

Denny Oklak, Chairman and Chief Executive Officer, said, "I am pleased to announce another strong quarter of operations. Overall occupancy on our 146 million square feet of in-service properties is now at 95.4 percent. Our in-service bulk industrial portfolio is now 96.6% leased. We are executing on our strategy to capture rental rate growth with third quarter growth on renewal leases accelerating to 9.0 percent. We also continued to take advantage of a strong investment sales environment, executing $185 million of asset dispositions during the quarter, bringing the total dispositions for the year to $561 million. We continue to re-deploy the proceeds from these sales into primarily bulk industrial development projects in high growth markets."

Mark Denien, Chief Financial Officer, commented, "During the quarter we executed on the previously announced redemption of our 6.625 percent Series J Preferred Shares, which will result in an over $6 million reduction to preferred dividends on an annualized basis. This transaction, when coupled with our continued operational improvements, has allowed us to continue to improve our key leverage metrics during the quarter. I am also pleased to announce that, earlier this month, we extended our line of credit through January 2019 while increasing our borrowing capacity from $850 million to $1.2 billion and reducing our interest rate from LIBOR plus 1.25 percent to LIBOR plus 1.05 percent."

Core FFO for the third quarter of 2014 increased by more than $11 million, or $0.02 per share, from the third quarter of 2013 due to improved rental operations and lower interest expense. A reconciliation of net income to FFO as defined by NAREIT, as well as to Core FFO, is in the financial tables included with this release.

Net income was $0.18 per diluted share for the third quarter of 2014 compared to a loss of $0.02 per diluted share for the same quarter in 2013. In addition to the above-mentioned factors related to the increase in Core FFO, net income per share improved as the result of increased gains on sales of depreciable properties in 2014, when considering both wholly-owned properties and our share of one joint venture property sale.

Portfolio Operating Performance

Strong overall operating performance across all product types:

In-service occupancy in the bulk distribution portfolio at September 30, 2014 of 96.6 percent compared to 95.6 percent at June 30, 2014;

In-service occupancy in the suburban office portfolio of 87.7 percent at both September 30 and June 30, 2014;

In-service occupancy in the medical office portfolio of 93.9 percent at both September 30 and June 30, 2014;

Tenant retention rate of 58 percent for the quarter, with overall renewal rental rate growth of 9.0 percent. Immediate backfill leases were executed for a significant portion of the space that was not renewed during the quarter;

Same-property net operating income growth of 3.8 percent for the twelve months ended September 30, 2014 and 6.0 percent for the three months ended September 30, 2014 as compared to the periods ended September 30, 2013.

Real Estate Investment Activity

Development

Jim Connor, Chief Operating Officer, stated, "We began three projects totaling 1.1 million square feet with total anticipated costs of $100 million during the third quarter. Included in these projects is a 783,000 speculative industrial project in the Inland Empire of Southern California, located in a premier distribution corridor adjacent to a primary interstate."

The third quarter included the following development activity:

Wholly-Owned Properties

During the quarter the company started $100 million of new wholly-owned development projects totaling 1.1 million square feet, which are 25 percent leased in total and have an average initial expected stabilized cash yield of 6.8 percent. These wholly-owned development starts consisted of two industrial projects, one of which was speculative and one was a build-to-suit, and one 71 percent pre-leased suburban office project in Raleigh;

Wholly-owned development projects under construction at September 30, 2014 consisted of 16 industrial projects totaling 6.5 million square feet, four medical office projects totaling 250,000 square feet and two suburban office projects totaling 305,000 square feet, which were 66 percent pre-leased in the aggregate;

Three industrial projects and one industrial building expansion, which were 100 percent leased and totaled 1.5 million square feet were placed in service; along with three medical office projects that were 100 percent leased and one suburban office project that was 74 percent leased.

Joint Venture Properties

Joint venture development projects under construction at September 30, 2014 consisted of two industrial projects totaling 1.2 million square feet, which are 25 percent pre-leased;

Two 100 percent leased joint venture industrial projects, totaling 1.8 million square feet, were placed in service.

Building Dispositions

Building dispositions totaled more than $175 million in the third quarter and were comprised of the following:

Wholly-Owned Properties

Two suburban office properties in South Florida, which were 88 percent leased and totaled 466,000 square feet, for $128 million;

Joint Venture Properties

Three suburban office properties in Central Florida, which were 90 percent leased and totaled 415,000 square feet, from an unconsolidated joint venture for a total sales price of $80 million, of which the company's share was $40 million;

Eleven industrial buildings in Indianapolis for which the company's share of the sales price was $7 million.

2014 Earnings Guidance

The company revised its previous Core FFO guidance for 2014 to a range of $1.17 to $1.19 per share, compared to previous guidance of $1.15 to $1.19 per share. The guidance for AFFO per share was revised to a range of $0.95 to $0.97 per share, compared to the previous guidance of $0.93 to $0.97 per share. The estimate for the increase in same property net operating income, for the twelve months ended De