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Duke Realty Reports First Quarter 2017 Results
In-Service Occupancy of 97.7 Percent
$278 Million of 76 Percent Pre-Leased Development Starts
23.5 Percent Rent Growth on Leases
2017 Guidance Updated

INDIANAPOLIS, IN -- (Marketwired) -- 04/26/17 --

Duke Realty Corporation (NYSE: DRE), a leading industrial and medical office property REIT, today reported results for the first quarter of 2017.

Quarterly Highlights

  • Net income per diluted share was $0.20 for the quarter. Funds from Operations ("FFO") per diluted share, as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), was $0.32 for the quarter while Core Funds from Operations ("Core FFO") per diluted share was also $0.32 for the quarter.
  • Portfolio operating performance:
    - Total in-service occupancy at March 31, 2017 of 97.7 percent compared to 97.5 percent at December 31, 2016 and 95.7 percent at March 31, 2016
    - In-service occupancy in the bulk distribution portfolio at March 31, 2017 of 97.9 percent compared to 97.7 percent at December 31, 2016 and 95.7 percent at March 31, 2016
    - In-service occupancy in the medical office portfolio of 94.3 percent at March 31, 2017 compared to 95.3 percent at December 31, 2016 and 95.6 percent at March 31, 2016. Medical office occupancy slightly decreased due to development properties, which were not fully leased, being placed in service in the first quarter.
    - Total occupancy, including properties under development, of 95.8 percent at March 31, 2017 compared to 95.6 percent at December 31, 2016 and 94.7 percent at March 31, 2016
    - Tenant retention of 84 percent for the quarter
    - Same-property net operating income growth of 5.2 percent for the quarter ended March 31, 2017 as compared to the quarter ended March 31, 2016
    - Total leasing activity of 5.5 million square feet for the quarter
    - Overall rent growth on new and renewal leases of 23.5 percent for the quarter
  • Successful execution of capital transactions:
    - Completed $115 million of non-strategic building and land dispositions during the quarter
    - Completed $115 million of acquisitions of five bulk industrial buildings and one medical office property during the quarter

Jim Connor, President and CEO, said, "We increased in-service occupancy to 97.7 percent, which exceeded the record-high level of in-service occupancy that was achieved at December 31, 2016. Although we believe we have reached peak occupancy, we expect in-service occupancy to continue at very high levels through the rest of 2017. Same-property net operating income growth continued at a strong pace, increasing by 5.2 percent, while combined rent growth on new second generation leases and renewals totaled 23.5 percent for the quarter."

Financial Performance

  • A complete reconciliation, in dollars and per share amounts, of net income to FFO, as defined by NAREIT, as well as to Core FFO, is included in the financial tables included in this release. The following table reconciles diluted income per common share to diluted FFO per share, as defined by NAREIT, and to diluted Core FFO per share as measured by the company for the three months ended March 31, 2017 and 2016:
       
    Three Months Ended March 31  
     2017      2016  
Net income per common share, diluted   $ 0.20     $ 0.12  
Adjustments:                
  Depreciation and amortization     0.23       0.22  
  Gains on depreciable property sales     (0.10 )     (0.04 )
  Share of reconciling items from joint ventures           (0.04 )
FFO per share - diluted, as defined by NAREIT   $ 0.32     $ 0.26  
Adjustments:                
  Gains on land sales            
  Loss on debt extinguishment            
  Land impairment charges           0.02  
  Acquisition-related activity            
Core FFO per share – diluted   $ 0.32     $ 0.28  
                 
  • Net income was $0.20 per diluted share, or $71 million, for the first quarter of 2017 compared to $0.12 per diluted share for the first quarter of 2016. The increase from the first quarter of 2016 was primarily attributable to increased gains on the sale of depreciable properties.
  • FFO, as defined by NAREIT, was $0.32 per diluted share for the first quarter of 2017, or $117 million, compared to $0.26 per diluted share for the first quarter of 2016. The increase to FFO, as defined by NAREIT, per diluted share was due to lease buyout income of $9.6 million recognized in the first quarter of 2017 related to one of our few remaining suburban office properties, land impairment charges recognized during the first quarter of 2016, improved operational performance and lower interest expense that resulted from reducing leverage and refinancing higher rate debt throughout 2016, all partially offset by $2.1 million of tax expense related to the lease buyout.
  • Core FFO was $0.32 per diluted share, or $115 million, for the first quarter of 2017 compared to $0.28 per diluted share for the first quarter of 2016. Aside from land impairment charges, Core FFO was impacted by the same factors driving the increase in FFO, as defined by NAREIT.

Real Estate Investment Activity

Development

Mr. Connor further stated, "We started $278 million of developments, which were 76 percent pre-leased in total and we finished the quarter with a development pipeline totaling 11.0 million square feet with total expected project costs of $875 million, that was 73 percent pre-leased in total. As reflected in our updated 2017 guidance, we expect to continue development activities at a robust pace through the rest of 2017 while maintaining a high pre-leasing level."

The first quarter included the following development activity:

Wholly Owned Properties

  • During the quarter, the company started $232 million of wholly owned bulk industrial development projects totaling 2.9 million square feet, which were 72 percent pre-leased in total. These wholly owned development starts were comprised of six new industrial developments, which included a 100 percent pre-leased project in Houston totaling one million square feet, a 100 percent pre-leased project in Southern California totaling 477,000 square feet, a 100 percent pre-leased project in Dallas totaling 557,000 square feet and three speculative projects in other markets totaling 803,000 square feet.
  • The company also started a wholly owned medical office project during the quarter, totaling 99,000 square feet, which was 100 percent pre-leased.
  • Three industrial projects totaling 965,000 square feet, which were 100 percent leased, were placed in service during the quarter. Two medical office projects, totaling 182,000 square feet, which were 67 percent leased in total, were also placed in service during the quarter.

Joint Venture Properties

  • During the quarter, a 50 percent-owned joint venture started a 251,000 square foot bulk industrial product in Indianapolis, which was 100 percent pre-leased, while another 50 percent-owned joint venture started a 192,000 square foot bulk industrial project in Columbus, which was initially approved as a 26 percent pre-leased project but was subsequently fully pre-leased.
  • A 708,000 square foot speculative industrial project in Indianapolis was placed in service during the quarter by a 50 percent-owned joint venture.

Acquisitions

The company acquired four recently completed bulk industrial properties in Southern California, totaling 752,000 square feet. Three of the four properties were 100 percent leased, while one of the four properties was acquired vacant but fully leased shortly after acquisition.

The company also acquired a 100 percent leased, 225,000 square foot, recently completed industrial property in Atlanta and a 100 percent leased 71,000 square foot medical office property.

Building Dispositions

Building dispositions totaled $90 million in the first quarter and included the following:

Wholly Owned Properties

  • A five-building portfolio of suburban office properties in Indianapolis, which was 96 percent leased and totaled 548,000 square feet
  • A 446,500 square foot, 100 percent leased non-strategic industrial property, which was our sole property in Kansas City

Joint Venture Properties

  • A 159,000 square foot non-strategic industrial property in Dallas, which was 100 percent leased

Distributions Declared

The company's board of directors declared a quarterly cash distribution on its common stock of $0.19 per share, or $0.76 per share on an annualized basis. The first quarter dividend will be payable on May 31, 2017 to shareholders of record on May 16, 2017.

2017 Earnings Guidance

A reconciliation of the company's per share guidance for diluted net income per common share to FFO, as defined by NAREIT and to Core FFO is included in the financial tables to this release. The company revised its guidance for net income to $0.68 to $0.87 per diluted share from its previous guidance of $0.38 to $0.59 per diluted share. The company revised its guidance for FFO, as defined by NAREIT, to $1.23 to $1.33 per diluted share from its previous guidance of $1.18 to $1.30 and also revised its guidance for Core FFO to $1.24 to $1.30 per diluted share from its previous range of $1.21 to $1.27 per diluted share. The company revised its guidance for the range of growth in adjusted funds from operations ("AFFO"), on a share adjusted basis, to a range of 4.7 percent to 10.3 percent from the previous range of 1.9 percent to 7.5 percent.

Key changes to the assumptions underlying this updated guidance are as follows:

  • The estimate for acquisitions was increased to a range of $100 million to $150 million from the previous range of $50 million to $100 million;
  • The estimate for dispositions was increased to a range of $300 million to $500 million from the previous range of $150 million to $350 million;
  • The estimate for development starts was increased to a range of $500 million to $700 million from the previous range of $450 million to $650 million.

More specific assumptions and components of our 2017 guidance will be available by 6:00 p.m. Eastern Time today through the Investor Relations section of the company's website.

FFO and AFFO Reporting Definitions

FFO: FFO is computed in accordance with standards established by NAREIT. NAREIT defines FFO as net income (loss) excluding gains (losses) on sales of depreciable property, impairment charges related to depreciable real estate assets; plus real estate related depreciation and amortization, and after similar adjustments for unconsolidated joint ventures. The company believes FFO to be most directly comparable to net income as defined by generally accepted accounting principles ("GAAP"). The company believes that FFO should be examined in conjunction with net income (as defined by GAAP) as presented in the financial statements accompanying this release. FFO does not represent a measure of liquidity, nor is it indicative of funds available for the company's cash needs, including the company's ability to make cash distributions to shareholders.

Core FFO: Core FFO is computed as FFO adjusted for certain items that are generally non-cash in nature and that materially distort the comparative measurement of company performance over time. The adjustments include gains on sale of undeveloped land, impairment charges not related to depreciable real estate assets, tax expenses or benefits related to (i) changes in deferred tax asset valuation allowances, (ii) changes in tax exposure accruals that were established as the result of the adoption of new accounting principles, or (iii) taxable income (loss) related to other items excluded from FFO or Core FFO (collectively referred to as "other income tax items"), gains (losses) on debt transactions, gains (losses) on and related costs of acquisitions, gains on sale of merchant buildings, promote income and severance charges related to major overhead restructuring activities. Although the company's calculation of Core FFO differs from NAREIT's definition of FFO and may not be comparable to that of other REITs and real estate companies, the company believes it provides a meaningful supplemental measure of its operating performance.

AFFO: AFFO is a supplemental performance measure defined by the company as Core FFO (as defined above), less recurring building improvements and total second generation capital expenditures (the leasing of vacant space that had previously been under lease by the company is referred to as second generation lease activity) related to leases commencing during the reporting period and adjusted for certain non-cash items including straight line rental income and expense, non-cash components of interest expense and stock compensation expense, and after similar adjustments for unconsolidated partnerships and joint ventures.

Same-Property Performance

The company includes same-property net operating income growth as a property-level supplemental measure of performance. The company utilizes same-property net operating income growth as a supplemental measure to evaluate property-level performance, and jointly-controlled properties are included at the company's ownership percentage.

A reconciliation of net income from continuing operations to same property net operating income is included in the financial tables to this release. A description of the properties that are excluded from the company's same-property net operating income measure is included on page 19 of its March 31, 2017 supplemental information.

About Duke Realty Corporation

Duke Realty Corporation owns and operates approximately 142 million rentable square feet of industrial, medical office and other non core assets in 21 major U.S. metropolitan areas. Duke Realty Corporation is publicly traded on the NYSE under the symbol DRE and is listed on the S&P MidCap 400 Index. More information about Duke Realty Corporation is available at www.dukerealty.com.

First Quarter Earnings Call and Supplemental Information

Duke Realty Corporation is hosting a conference call tomorrow, April 27, 2017, at 3:00 p.m. ET to discuss its first quarter operating results. All investors and other interested parties are invited to listen to the call. Access is available through the Investor Relations section of the company's website.

A copy of the company's supplemental information will be available by 6:00 p.m. ET today through the Investor Relations section of the company's website.

Cautionary Notice Regarding Forward-Looking Statements

This news release may contain forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts, including, among others, statements regarding the company's future financial position or results, future dividends, and future performance, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the company, members of its management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should," or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements. Many of these factors are beyond the company's abilities to control or predict. Such factors include, but are not limited to, (i) general adverse economic and local real estate conditions; (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; (iii) financing risks, such as the inability to obtain equity, debt or other sources of financing or refinancing on favorable terms, if at all; (iv) the company's ability to raise capital by selling its assets; (v) changes in governmental laws and regulations; (vi) the level and volatility of interest rates and foreign currency exchange rates; (vii) valuation of joint venture investments, (viii) valuation of marketable securities and other investments; (ix) valuation of real estate; (x) increases in operating costs; (xi) changes in the dividend policy for the company's common stock; (xii) the reduction in the company's income in the event of multiple lease terminations by tenants; (xiii) impairment charges, (xiv) the effects of geopolitical instability and risks such as terrorist attacks; (xv) the effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes; and (xvi) the effect of any damage to our reputation resulting from developments relating to any of items (i) – (xv). Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements is contained from time to time in the company's filings with the Securities and Exchange Commission. The company refers you to the section entitled "Risk Factors" contained in the company's Annual Report on Form 10-K for the year ended December 31, 2016. Copies of each filing may be obtained from the company or the Securities and Exchange Commission.

The risks included here are not exhaustive and undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to the company, its management, or persons acting on their behalf are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and the company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless otherwise required by law.

   
Duke Realty Corporation and Subsidiaries  
Consolidated Statement of Operations  
(Unaudited and in thousands, except per share amounts)  
       
    Three Months Ended  
    March 31,  
    2017     2016  
Revenues:                
  Rental and related revenue   $ 217,915     $ 201,803  
  General contractor and service fee revenue     9,399       23,151  
      227,314       224,954  
Expenses:                
  Rental expenses     25,271       29,278  
  Real estate taxes     32,473       29,627  
  General contractor and other services expenses     7,624       20,920  
  Depreciation and amortization     81,557       77,798  
      146,925       157,623  
Other operating activities:                
  Equity in earnings of unconsolidated companies     4,749       21,860  
  Gain on sale of properties     37,046       15,577  
  Gain on land sales     1,505       130  
  Other operating expenses     (738 )     (1,237 )
  Impairment charges     (859 )     (6,405 )
  General and administrative expenses     (19,232 )     (18,098 )
      22,471       11,827  
                 
    Operating income     102,860       79,158  
                 
Other income (expenses):                
  Interest and other income, net     533       2,523  
  Interest expense     (30,505 )     (37,730 )
  Gain on debt extinguishment     25       -  
  Acquisition-related activity     -       (3 )
Income from continuing operations, before income taxes     72,913       43,948  
  Income tax expense     (2,132 )     (343 )
    Income from continuing operations     70,781       43,605  
                 
Discontinued operations:                
  Income before gain on sales     -       237  
  Gain on sale of depreciable properties, net of tax     -       (86 )
    Income from discontinued operations     -       151  
                 
Net income     70,781       43,756  
Net income attributable to noncontrolling interests     (581 )     (449 )
    Net income attributable to common shareholders   $ 70,200     $ 43,307  
                 
Basic net income per common share:                
  Continuing operations attributable to common shareholders   $ 0.20     $ 0.12  
                 
Diluted net income per common share:                
  Continuing operations attributable to common shareholders   $ 0.20     $ 0.12  
                 
   
Duke Realty Corporation and Subsidiaries  
Consolidated Balance Sheets  
(Unaudited and in thousands)  
             
    March 31,     December 31,  
    2017     2016  
  Assets                
Real estate investments:                
  Real estate assets   $ 6,592,579     $ 6,482,155  
  Construction in progress     441,058       347,193  
  Investments in and advances to unconsolidated companies     192,709       197,807  
  Undeveloped land     217,017       237,436  
      7,443,363       7,264,591  
  Accumulated depreciation     (1,325,431 )     (1,283,629 )
                 
    Net real estate investments     6,117,932       5,980,962  
                 
Real estate investments and other assets held-for-sale     81,563       51,627  
                 
Cash and cash equivalents     13,389       12,639  
Accounts receivable, net     19,089       20,373  
Straight-line rents receivable, net     116,083       115,922  
Receivables on construction contracts, including retentions     5,001       10,441  
Deferred leasing and other costs, net     338,733       342,263  
Escrow deposits and other assets     266,720       237,775  
                 
    $ 6,958,510     $ 6,772,002  
                 
  Liabilities and Equity                
Indebtedness:                
  Secured debt, net of deferred financing costs   $ 366,238     $ 383,725  
  Unsecured debt, net of deferred financing costs     2,477,024       2,476,752  
  Unsecured line of credit     237,000       48,000  
      3,080,262       2,908,477  
                 
Liabilities related to real estate investments held-for-sale     2,708       1,661  
                 
Construction payables and amounts due subcontractors, including retentions     67,004       53,742  
Accrued real estate taxes     69,823       73,190  
Accrued interest     28,865       23,633  
Other liabilities     168,583       178,186  
Tenant security deposits and prepaid rents     43,385       39,820  
    Total liabilities     3,460,630       3,278,709  
                 
Shareholders' equity:                
                 
  Common shares     3,556       3,548  
  Additional paid-in-capital     5,191,389       5,192,011  
  Accumulated other comprehensive income     426       682  
  Distributions in excess of net income     (1,728,170 )     (1,730,423 )
    Total shareholders' equity     3,467,201       3,465,818  
                 
Noncontrolling interests     30,679       27,475  
  Total equity     3,497,880       3,493,293  
                 
    $ 6,958,510     $ 6,772,002  
                 
 
Duke Realty Corporation and Subsidiaries
Summary of EPS, FFO and AFFO
Three Months Ended March 31
(Unaudited and in thousands, except per share amounts)
     
    2017   2016
   

Amount
    Wtd.
Avg.
Shares
 
Per
Share
 

Amount
    Wtd.
Avg.
Shares
 
Per
Share
Net income attributable to common shareholders   $ 70,200               $ 43,307            
Less: dividends on participating securities     (542 )               (584 )          
Net income per common share- basic     69,658     355,282   $ 0.20     42,723     345,665   $ 0.12
Add back:                                    
  Noncontrolling interest in earnings of unitholders     652     3,316           438     3,498      
  Other potentially dilutive securities     305     2,102           -     511      
Net income attributable to common shareholders- diluted   $ 70,615     360,700   $ 0.20   $ 43,161     349,674   $ 0.12
                                     
Reconciliation to funds from operations ("FFO")                                    
Net income attributable to common shareholders   $ 70,200     355,282         $ 43,307     345,665      
Adjustments:                                    
  Depreciation and amortization     81,557                 77,798            
  Company share of joint venture depreciation, amortization and other     2,495                 3,639            
  Impairment charges - depreciable property     859                 -            
  Gains on depreciable property sales - wholly owned, discontinued operations     -                 86            
  Gains on depreciable property sales - wholly owned, continuing operations     (37,046 )               (15,577 )          
  Income tax expense triggered by depreciable property sales     -                 343            
  Gains on depreciable property sales - joint ventures     (1,798 )               (17,942 )          
  Noncontrolling interest share of adjustments     (427 )               (484 )          
NAREIT FFO attributable to common shareholders - basic     115,840     355,282   $ 0.33     91,170     345,665   $ 0.26
  Noncontrolling interest in income of unitholders     652     3,316           438     3,498      
  Noncontrolling interest share of adjustments     427                 484            
  Other potentially dilutive securities           3,163                 3,279      
NAREIT FFO attributable to common shareholders - diluted   $ 116,919     361,761   $ 0.32   $ 92,092     352,442   $ 0.26
  Gain on land sales, including share of joint ventures     (1,505 )               (130 )          
  Loss (gain) on debt extinguishment, including share of joint ventures     (25 )               1,592            
  Land impairment charges     -                 6,405            
  Acquisition-related activity     -                 3            
Core FFO attributable to common shareholders - diluted   $ 115,389     361,761   $ 0.32   $ 99,962     352,442   $ 0.28
                                     
Adjusted FFO                                    
Core FFO - diluted   $ 115,389     361,761   $ 0.32   $ 99,962     352,442   $ 0.28
Adjustments:                                    
  Straight-line rental income and expense     (3,319 )               (3,711 )          
  Amortization of above/below market rents and concessions     542                 634            
  Stock based compensation expense     10,480                 10,378            
  Noncash interest expense     1,555                 1,458            
  Second generation tenant improvements     (2,812 )               (8,017 )          
  Second generation leasing commissions     (2,409 )               (9,798 )          
  Building improvements     (1,244 )               (521 )          
Adjusted FFO - diluted   $ 118,182     361,761         $ 90,385     352,442      
                                     
Duke Realty Corporation and Subsidiaries  
Reconciliation of Same Property Net Operating Income Growth  
(Unaudited and in thousands)  
                 
        Three Months Ended  
        March 31, 2017     March 31, 2016  
                       
Income from continuing operations before income taxes         $ 72,913     $ 43,948  
Share of same property NOI from unconsolidated joint ventures           4,913       5,269  
Income and expense items not allocated to segments           89,616       101,583  
Earnings from service operations           (1,775 )     (2,231 )
Properties not included and other adjustments           (32,901 )     (22,361 )
Same property NOI         $ 132,766     $ 126,208  
                       
Percent Change           5.2 %        
                       
                       
Duke Realty Corporation and Subsidiaries  
Reconciliation of 2017 FFO Guidance  
(Unaudited)  
                 
    Pessimistic   Reprojection     Optimistic  
Net income per common share, diluted   $ 0.68   $ 0.80     $ 0.87  
Depreciation and gains on sales of depreciated property (including share of joint venture)     0.55     0.49       0.46  
FFO per share - diluted, as defined by NAREIT   $ 1.23   $ 1.29     $ 1.33  
Gains on land sales     0.00     (0.02 )     (0.03 )
Other reconciling items     0.01     0.00       0.00  
Core FFO per share - diluted   $ 1.24   $ 1.27     $ 1.30  
                       

Contact Information:

Investors:
Ron Hubbard
317.808.6060

Media:
Helen McCarthy
317.708.8010

Source: Duke Realty Corporation