Duke Realty's (DRE) Q2 FFO In Line, Revises Guidance

Duke Realty Corp. (NYSE:DRE) reported second-quarter 2016 core funds from operations (“FFO”) per share of 30 cents, which came in line with the Zacks Consensus Estimate and was up 2 cents from that of prior-year quarter tally. The quarter witnessed in-service occupancy in the bulk distribution portfolio reaching the highest level.

Total rental and related revenue for second-quarter 2016 was $200.5 million, down 0.7% year over year. The Zacks Consensus Estimate for the same was $202 million.

Portpolio Occupancy Reached Highest

Duke Realty leased around 6.9 million square feet of space in the quarter. Also, with a tenant retention rate of about 63%, the company experienced an overall growth of 18.6% in renewal rental rate. The renewal rental rate was adversely impacted as the quarter witnessed four large expirations which were backfilled soon with new leases.

If the backfilled leases were considered as renewals, tenant retention should have been 94.6%. Same-property net operating income climbed 3.5% on a year-over-year basis.

As of Jun 30, 2016, the company’s overall portfolio occupancy was up 90 basis points (bps) to 95.6% on a sequential basis. In-service portfolio occupancy in bulk distribution portfolio rose 100 bps sequentially to 96.7%. The same in medical office portfolio rose 20 bps to 95.8%.

In second-quarter 2016, Duke Realty commenced $108 million of mainly speculative, wholly-owned industrial development projects and was able to maintain the overall development pipeline with a healthy pre-lease rate of 72%. Also, the company executed property disposition to the tune of $173 million during the quarter.

Duke Realty exited the quarter with $91.7 million of cash and cash equivalents, up from $22.5 million as of Dec 31, 2015.

2016 Guidance

Duke Realty revised 2016 guidance for core FFO per share to $1.16−$1.20 from the earlier guidance of $1.15−$1.21. The Zacks Consensus Estimate of $1.18 for 2016 falls in this range.

Dividend Update

Concurrent with its earnings release, Duke Realty announced quarterly cash dividend on common stock of 18 cents per share. The second-quarter dividend will be paid on Aug 31, 2016 to shareholders of record as of Aug 16.

Our Viewpoint

Duke Realty’s initiatives to boost exposure in industrial assets and presence of healthcare assets augur well for the long term. Moreover, the company’s strategically located high-quality properties, along with a leveraged local presence, are encouraging.

Nevertheless, operational risks related to large development pipeline, near-term dilutive effect of continued divestiture and any further rise in the interest rate pose concerns before Duke Realty.

Currently, Duke Realty has a Zacks Rank #3 (Hold).

We now look forward to the earnings releases of General Growth Properties, Inc (NYSE:GGP) , Welltower Inc. (NYSE:HCN) and Vornado Realty Trust (NYSE:VNO) which are scheduled next week.

Note: All EPS numbers presented in this write-up represent funds from operations (“FFO”) per share. 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.