Duke Realty Details $1.1B Deal

Posted: Updated:

Indianapolis-based Duke Realty Corp. (NYSE: DRE) has announced the sale of $1.1 billion in suburban office space and land assets. An affiliate of Connecticut-based Starwood Capital Group is leading multiple investors on the purchase. Duke Realty Chief Executive Officer Denny Oklak says the company has been working for years to reposition itself more in the industrial and medical property markets.

The announcement was released in the real estate investment trust's quarterly earnings report. Duke Realty says full-year core funds from operations were $406 million, compared to $364 million in 2013.

The company is also reporting FFO of $105 million for the quarter, compared to $97 million during the same period a year earlier.

January 28, 2015

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 2014.

Denny Oklak, Chairman and Chief Executive Officer, said, "We finished 2014 with an excellent fourth quarter from an operational perspective and successfully executed several accretive capital transactions. We continued our strong operational performance, finishing the quarter with in-service portfolio occupancy of 95.3 percent, which is especially impressive when considering that we placed in service 26 development projects, totaling 7.0 million square feet, during the year. We also renewed 9.5 million square feet of leases during 2014, which included average annual net effective rent growth across all product types at an average 8.8 percent increase for the year and 11.2 percent for the fourth quarter. Our ability to increase occupancy and drive rent growth resulted in 4.4 percent growth in same property net operating income for both the three and twelve month periods ended December 31, 2014."

Commenting on the disposition transaction, Mr. Oklak also stated, "I am pleased to announce the execution of an agreement to sell an approximate $1.1 billion suburban office portfolio, comprised of all of our wholly-owned suburban office properties in Nashville, Raleigh, South Florida and St. Louis. The portfolio consists of 61 in-service properties, one property that is under development and 57 acres of undeveloped land. This transaction is a continuation of our strategy to increase our focus on bulk industrial and medical office properties and to reduce our investment in suburban office assets. The proceeds from this transaction will be utilized to repay debt and to fund our ongoing development activities."

Quarterly and Full Year Highlights

Core Funds from Operations ("Core FFO") per diluted share was $0.30 for the quarter and $1.18 for the year. Funds from Operations ("FFO") per diluted share, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), was $0.20 for the quarter and $1.07 for the year.

Adjusted Funds from Operations ("AFFO") of $0.21 per diluted share for the quarter, and $0.96 per diluted share for the year, which represents dividend pay-out ratios of 81 percent and 71 percent, respectively.

Strong operating momentum:

Total portfolio occupancy of 93.8 percent and in-service portfolio occupancy of 95.3 percent;

Total leasing activity of 4.1 million square feet for the quarter and 25.1 million square feet for the year;

Same-property net operating income growth of 4.4 percent as compared to both the quarter and year ended December 31, 2013.

Successful execution of capital transactions:

Completed $204 million of building dispositions for the quarter and $736 million for the full year;

Monetized $97 million of undeveloped land during 2014 through development projects and land sales, which totaled $37 million;

Began $144 million of new developments for the quarter and $563 million for the year, comprised of 66 percent industrial, 20 percent medical office and 14 percent office, for the year;

Completed $32 million of acquisitions for the quarter and $131 million of acquisitions for the year;

Issued 1.7 million shares of common stock under the ATM program at an average issue price of $19.36 per share, which generated net proceeds of $33 million during the quarter, and 16.4 million shares at an average issue price of $17.85 per share, which generated net proceeds of $289 million for the year;

Redeemed all outstanding 6.5 percent Series K Preferred Shares and 6.6 percent Series L Preferred Shares for a total redemption amount of $333 million during the fourth quarter. All outstanding preferred stock was either redeemed or repurchased during 2014 for a total of $448 million;

Issued $300 million of unsecured notes, due in December 2024 and bearing interest at an effective rate of 3.9 percent, during the fourth quarter of 2014.

Mark Denien, Chief Financial Officer, commented, "During the fourth quarter we took advantage of the continued low interest rate environment to issue $300 million of ten-year notes at an effective interest rate of 3.9 percent. Using the proceeds of this offering, as well as the proceeds from the fourth quarter's property dispositions, we redeemed our last two outstanding series of preferred shares, which will result in a nearly $22 million reduction to preferred dividends on an annualized basis. These transactions substantially improve our liquidity, reduce our cost of capital and provide for improvements to our key leverage metrics."

Financial Performance

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

Core FFO was $105 million, or $0.30 per diluted share, for the fourth quarter of 2014, an increase from $97 million, or $0.29 per diluted share, in the fourth quarter of 2013. Core FFO was $406 million, or $1.18 per diluted share, for the full year 2014, an increase from $364 million, or $1.10 per diluted share, in 2013. The improvement in Core FFO, for both the fourth quarter and the full year 2014, was the result of improved rental operations, lower preferred dividends and lower interest expense.

FFO, as defined by NAREIT, was $0.20 per diluted share for the fourth quarter of 2014, a decrease from $0.28 per share in the fourth quarter of 2013. The decrease was the result of non-cash charges for impairments of undeveloped land as well as the impact of non-cash adjustments related to the preferred stock redeemed during the quarter. FFO, as defined by NAREIT, was $1.07 per diluted share for both the full years 2014 and 2013. The aforementioned non-cash charges that negatively impacted FFO as defined by NAREIT in 2014 were more than offset by the improved rental operations, lower preferred dividends and lower interest expense that drove the increase in Core FFO.

Net loss was $0.01 per diluted share for the fourth quarter of 2014, compared to net income of $0.21 per diluted share for the fourth quarter of 2013. In addition to the factors that impacted the FFO measures described above, net income for the fourth quarter of 2013 included significantly higher gains on depreciable property sales when compared to the fourth quarter of 2014. The fourth quarter of 2014 net loss also included $14 million of non-cash impairment charges on depreciable properties, which are not included in FFO as defined by NAREIT. Net income was $0.60 per diluted share for the full year 2014 compared to $0.47 per diluted share for 2013. The increase to net income per share for 2014 was due to significantly higher gains on depreciable property sales during the full year 2014, when compared to the full year 2013.

Portfolio Operating Performance

Strong overall operating performance across all product types:

In-service occupancy in the bulk distribution portfolio of 96.4 p