Operating Highlights
-- FFO per share of $0.71 for the quarter and $2.55 for the year.
-- Liquidity position enhanced:
- Dividend reduced; $150 million in cash to be retained annually;
- Properties and land sold; $265 million in cash generated in the
fourth quarter;
- Repurchased $38.5 million of unsecured debt obligations at a discount
in the fourth quarter.
-- Operating expenses reduced:
- Retail, national build-to-suit development businesses closed;
- Operations in start-up markets discontinued;
- Workforce reduced; management salaries frozen
-- 2009 FFO guidance issued: $1.85 - $2.15 per share.
"We are pleased with the company's performance for the quarter given the
constrained capital markets and the current economy," said Dennis D. Oklak,
chairman and chief executive officer. "Leasing activity remained solid
during the quarter.
"Duke's long-term strategy as a fully integrated national owner, manager
and developer of industrial, office, and healthcare properties remains
sound."
Oklak continued, "Liquidity remains the most important priority for the
company in these difficult times. The company's short-term emphasis is on
strengthening its capital position, optimizing performance of existing
assets, and taking advantage of third-party development opportunities, such
as the recently announced Base Realignment and Closure Commission project
for the U. S. Army Corps of Engineers (BRAC)."
Financial Performance
-- FFO for the fourth quarter of 2008 was $0.71 ($0.69 excluding $14.0
million of gains on the repurchase of preferred stock and $11.4 million of
impairment charges), compared with $0.80 for the fourth quarter of 2007.
The variance is attributable to higher gains on the sale of land in the
fourth quarter of 2007 and to increased interest expense in 2008
attributable to properties that were recently placed in service. FFO for
the year ended December 31, 2008 was $2.55 ($2.53 excluding the gains on
the repurchase of preferred stock and impairment charges), compared with
$2.74 for 2007.
-- Net income per diluted share (EPS) for the fourth quarter was $0.15,
compared with $0.40 for the fourth quarter of 2007. The variance is
primarily attributable to the land sale gains and interest expense
mentioned above, and to resumption of depreciation on held-for-rental
assets previously classified as held-for-sale. EPS for the year ended
December 31, 2008 was $0.38, compared with $1.55 for 2007.
-- The company made opportunistic repurchases of $12.4 million of
preferred stock during the fourth quarter, resulting in the $14.0 million
gain. These transactions had a positive impact on the company's fixed-
charge ratios.
-- The company completed the $105 million land sale and began development
of the previously announced BRAC project in Alexandria, VA, which involves
relocation of various Department of Defense personnel from leased space in
Northern Virginia. The project, including a portion of the gain from the
land sale, contributed over $7 million to FFO from service operations
during the quarter.
-- The company incurred charges of $3.0 million during the quarter from
the write-off of costs related to development projects that it no longer
intends to pursue.
Common Stock Dividend Reduced; Liquidity Position Enhanced
Dividend Reduced
The company's Board of Directors has declared a quarterly cash dividend on
the company's common stock of $0.25 per share. The first quarter dividend
will be payable February 27, 2009 to shareholders of record as of February
13, 2009. The 2009 annual dividend of $1.00 per share is a reduction from
the 2008 annual dividend of $1.94 per share.
"Duke's dividend has increased every year since becoming a public company
in 1993," Oklak said. "In view of the unprecedented state of the capital
markets, we believe that it is prudent to reduce the dividend. Doing so
will enable us to retain approximately $150 million in cash annually, thus
strengthening the company's liquidity position going forward."
The Board also declared the following dividends on the company's
outstanding preferred stock:
Quarterly
Class NYSE Symbol Amount/Share Record Date Payment Date
-------- ----------- ------------- ----------------- -----------------
Series J DREPRJ $ 0.414063 February 13, 2009 February 27, 2009
Series K DREPRK $ 0.406250 February 13, 2009 February 27, 2009
Series L DREPRL $ 0.412500 February 13, 2009 February 27, 2009
Series M DREPRM $ 0.434375 March 17, 2009 March 31, 2009
Series N DREPRN $ 0.453125 March 17, 2009 March 31, 2009
Series O DREPRO $ 0.523438 March 17, 2009 March 31, 2009
Further Liquidity Enhancements Announced
Oklak noted that the company's unsecured bond maturities are modest through
December 31, 2010, amounting to $411.5 million, or 9.6% of total debt
outstanding. To further enhance its liquidity position, the company
executed the following transactions:
-- Dispositions of properties and undeveloped land, which generated over
$265 million in proceeds during the fourth quarter of 2008. These proceeds
will be used to pay down existing debt obligations, including $125 million
of unsecured bonds that mature in February 2009;
-- Repurchase of $38.5 million of unsecured debt in the fourth quarter
that was to mature in 2009 and 2010. In January 2009, the company
repurchased an additional $29.5 million of unsecured debt that was to
mature in 2009, 2010 and 2011. These total debt obligations of $68.0
million were repurchased for $59.9 million, a discount to par value of
11.9%;
-- In addition, during the first quarter of 2009, the company executed a
secured debt commitment for approximately $113 million and anticipates
obtaining an additional commitment of approximately $40 million within the
next few days. Both of these loans are expected to close during the first
quarter of 2009.
Operating Expense Reductions
The company has taken steps to align its operating costs with its
anticipated level of activity under current and expected economic
conditions. These steps included:
-- Exiting the retail and national build-to-suit development businesses;
-- A company-wide reduction in workforce of about 19% of total employees
since the beginning of 2008, which reflects the company's scaling back of
development operations;
-- A salary freeze for all of Duke's top 64 management employees in 2009;
and
-- Closing of operations in Austin and San Antonio, Texas; Seattle,
Washington; and Newport Beach, California.
"Management will continue to evaluate operating expenses and adjust them
accordingly throughout the year," Oklak noted.
"The decision to close operations in our newest markets was difficult,
given their long-term growth potential," Oklak explained. "However, the
lack of available capital and the company's emphasis on liquidity made the
possibility of developing properties in these markets remote in the near
term." Oklak added that the company's investment in these markets was
minimal. "We will consider returning to these markets once the economy
improves, in keeping with Duke's long-term strategy," he said.
Portfolio Performance
-- Duke's 703 stabilized, in-service properties (119 million square feet)
were 92.4% leased at December 31, 2008, compared with 93.8% and 95.0% at
September 30, 2008 and December 31, 2007, respectively. The decrease is
primarily attributable to the addition of properties to the stabilized
portfolio during the fourth quarter that have been in service for one year
but have not reached occupancy levels of at least 90%.
-- The company's total portfolio occupancy improved during the quarter to
88.9% at December 31, 2008, compared with 88.2% and 87.1% at September 30,
2008 and December 31, 2007, respectively.
-- The company executed major leases for properties during the fourth
quarter, including Grand Lakes II (653,000 square feet), an industrial
warehouse in Dallas; Buildings B-2 and B-4 of Chesapeake Commerce Center
(220,000 square feet), an industrial park in Baltimore which is now 100%
leased; and Lakeside Crossing II (116,000 square feet), an office building
in St. Louis.
-- The preponderance of the company's FFO in 2008 (92.2%) continued to be
attributable to core operations rather than to gains from dispositions of
assets.
-- Same-store net operating income increased 1.8% during the fourth
quarter and 3.0% for the year over 2007.
-- The company's tenant retention rates for the fourth quarter and the
year were 69.3% and 71.9%, respectively.
-- None of the company's tenants accounts for more than 1.7% of future
annualized gross effective rent as of December 31, 2008, and the largest
tenant of the company's in-service properties is the United States
government.
"The fundamentals of our portfolio held up well during 2008," Oklak
commented. "Looking ahead, we expect 2009 to be much more challenging from
a leasing perspective. We will continue to focus on renewals and extensions
of existing leases and continuing relationships with strong credit
tenants."
Real Estate Investment Activity
Development
Wholly Owned Properties
-- The company's wholly owned development pipeline at December 31, 2008
aggregated $372.6 million, with $230 million in remaining costs to be
incurred. The pipeline consisted of 18 properties (1.9 million square
feet) that were 86% preleased with an anticipated stabilized yield of 8.4%.
-- In accordance with its planned reduction in new development, the
company's starts for the fourth quarter aggregated only $43.4 million with
an average initial stabilized yield of 9.3%.These included an office
property for Monsanto in St. Louis and a healthcare project for the Baylor
University Medical Center in Dallas, both of which are 100% preleased.
-- The company placed into service three held-for-rental properties
(476,000 square feet) that were 33% leased.
Joint Venture Properties
-- The company's joint venture development pipeline at December 31, 2008
aggregated $356.6 million, with $167.0 million in remaining costs to be
incurred. The pipeline consisted of five properties (2.1 million square
feet) that were 12% preleased with an anticipated stabilized yield of 8.2%.
Each joint venture has obtained third-party debt to finance these
properties, with no anticipated future funding requirements from the
company. (All joint venture costs and square footage are reported at 100%
ownership.)
-- No joint venture properties were started or placed in service during
the fourth quarter.
Acquisitions
No properties were acquired during the fourth quarter.
Dispositions
Fourth quarter building dispositions were $119.3 million at a stabilized
capitalization rate of 7.2%. For the year ended December 31, 2008, the
company received gross proceeds from building dispositions of $426.3
million at a stabilized capitalization rate of 7.2%. In addition, the
company sold $147.8 million of land during the year, including 16 acres to
the United States government for $105 million as part of the BRAC project.
Real Estate Valuation
During the fourth quarter of 2008, the company completed a detailed review
of its operating and development assets and land holdings in accordance
with guidelines under generally accepted accounting principles. The
company recorded impairment charges for the quarter of $11.4 million, or
$0.07 per share, pertaining to certain land parcels ($8.6 million) and two
build-for-sale projects ($2.8 million). These charges were the result of
increases in estimated capitalization rates and changes in market
conditions that negatively affected values. These non-cash charges have no
effect on liquidity, nor do they have a material impact on compliance with
the company's credit facility or unsecured bond covenants.
The company also incurred charges of approximately $8.3 million, or $0.05
per share, for the year ended 2008 from the write-off of costs related to
development projects that it no longer intends to pursue.
Earnings Guidance and 2009 Outlook
"Looking ahead to the remainder of 2009, we expect another very challenging
year," Oklak said. "Capital will remain scarce, and new development will be
at a standstill. Our earnings guidance reflects the state of the economy
and our emphasis on liquidity and asset management. Once the economy
improves, we will be well-positioned to capitalize on opportunities in the
industrial, office and healthcare sectors in our existing markets."
The company expects FFO for 2009 to be in a range of $1.85 to $2.15 per
share. The assumptions underlying FFO guidance are as follows:
-- No gains from the sale of build-for-sale properties, compared with
$40.6 million, or $0.26 per share, in 2008;
-- Reduced land sale gains in 2009 of $0.04 per share compared to
approximately $0.08 in 2008;
-- Increased interest expense attributable to unstabilized development
properties that have recently been placed in service;
-- Slightly declining occupancy levels and same store growth in 2009
compared with 2008;
-- Additional non-cash interest expense of $0.04 per share associated
with the implementation of a new accounting pronouncement related to
convertible debt.
Guidance is provided for informational purposes and is subject to change.
More specific assumptions and components of 2009 FFO will be available
after 6:00 p.m. EST today through the Investor Relations section of the
company's Web site.
New Director Elected
Thomas J. Baltimore Jr. has been elected to the company's board of
directors. Mr. Baltimore is co-founder and president of RLJ Development, a
privately held real estate investment firm with almost $2 billion in equity
under management from several major public and corporate pension funds and
financial institutions. Prior to founding RLJ, Mr. Baltimore was a vice
president of Hilton Hotels Corporation and held various management
positions with Marriott Corporation. He serves on the board of directors of
Prudential Financial, Inc. and Integra LifeSciences Holdings Corporation.
About Duke Realty Corporation
Duke Realty Corporation specializes in the ownership, management and
development of office, industrial, and healthcare real estate. In terms of
market capitalization, Duke is the largest publicly traded, vertically
integrated office/industrial/healthcare real estate company in the United
States. The company owns, manages, or has under development more than 144
million rentable square feet in 20 major U.S. cities. 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 is
available at www.dukerealty.com.
Fourth Quarter Earnings Call and Supplemental Information
Duke is hosting a conference call tomorrow, January 29, 2009, at 3:00 p.m.
EST to discuss its fourth 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 Web site.
A copy of the company's supplemental information fact book will be
available after 6:00 p.m. EST today through the Investor Relations section
of the company's Web site.
Financial Highlights
(in thousands, except per share data)
Three Months Ended Twelve Months Ended
December 31, December 31,
========================== ==========================
Operating Results 2008 2007 2008 2007
============ ============ ============ ============
Revenues from
continuing
operations $ 264,531 $ 268,845 $ 996,087 $ 951,447
Earnings from
rental operations 14,920 43,208 79,565 126,346
Earnings from
service operations 25,402 25,781 61,943 52,034
Funds from
operations
available for
common
shareholders -
Basic 106,068 116,750 375,906 384,032
Funds from
operations
available for
common
shareholders -
Diluted 113,059 123,492 395,401 409,414
Net income
available for
common
shareholders -
Basic 21,717 58,666 56,616 217,692
Net income
available for
common
shareholders -
Diluted 22,824 61,964 59,584 232,091
Per Share:
Funds from
operations
available for
common
shareholders -
Basic $ 0.72 $ 0.80 $ 2.56 $ 2.76
Funds from
operations
available for
common
shareholders -
Diluted $ 0.71 $ 0.80 $ 2.55 $ 2.74
Net income
available for
common
shareholders -
Basic $ 0.15 $ 0.40 $ 0.39 $ 1.56
Net income
available for
common
shareholders -
Diluted $ 0.15 $ 0.40 $ 0.38 $ 1.55
Dividend payout
ratio of funds
from operations 68.3% 60.0% 75.9% 69.9%
Weighted average
shares outstanding
Basic - Funds
From Operations
and Net Income 147,615 145,623 146,915 139,255
Diluted- Funds
From Operations 159,631 154,467 155,041 149,614
Diluted- Net
Income 155,347 154,467 155,041 149,614
============ ============ ============ ============
December 31, December 31,
Balance Sheet Data 2008 2007
============ ============ ============ ============
Net real estate
investments $ 6,096,519 $ 6,101,332
Total assets 7,690,883 7,661,981
Total debt 4,298,478 4,316,460
Shareholders'
equity 2,821,758 2,750,033
Common shares
outstanding at end
of period 148,420 146,175
Reconciliation of Net Income to Funds From Operations
(in thousands, except per share data)
Three Months Ended
December 31,
(Unaudited)
---------------------------------------------------------
2008 2007
---------------------------- ----------------------------
Wtd. Wtd.
Avg. Per Avg. Per
Amount Shares Share Amount Shares Share
--------- ---------- ------ --------- ---------- ------
Net Income
Available for
Common Shares $ 21,717 147,615 $ 0.15 $ 58,666 145,623 $ 0.40
Add back:
Minority
interest in
earnings of
unitholders 1,107 7,299 3,298 8,146
Other
potentially
dilutive
shares 433 698
--------- ---------- --------- ----------
Diluted Net
Income
Available for
Common Shares $ 22,824 155,347 $ 0.15 $ 61,964 154,467 $ 0.40
========= ========== ====== ========= ========== ======
Reconciliation
to Funds From
Operations
("FFO")
Net Income
Available for
Common Shares $ 21,717 147,615 $ 0.15 $ 58,666 145,623 $ 0.40
Adjustments:
Depreciation
and
Amortization 83,996 69,469
Company
Share of
Joint
Venture
Depreciation
and
amortization 9,552 5,796
Earnings
from
depreciable
property
sales-wholly
owned (5,021) (9,321)
Earnings
from
depreciable
property
sales-JV 0 (4,416)
Minority
interest
share of
adjustments (4,176) (3,444)
--------- ---------- --------- ----------
Basic Funds From
Operations 106,068 147,615 $ 0.72 116,750 145,623 $ 0.80
Minority
interest in
earnings of
unitholders 1,107 7,299 3,298 8,146
Joint
venture
partner
convertible
ownership
option 1,708 4,284
Minority
interest
share of
adjustments 4,176 3,444
Other
potentially
dilutive
shares 433 698
--------- ---------- --------- ----------
Diluted Funds
From Operations $ 113,059 159,631 $ 0.71 $ 123,492 154,467 $ 0.80
========= ========== ====== ========= ========== ======
Twelve Months Ended
December 31,
(Unaudited)
---------------------------------------------------------
2008 2007
---------------------------- ----------------------------
Wtd. Wtd.
Avg. Per Avg. Per
Amount Shares Share Amount Shares Share
--------- ---------- ------ --------- ---------- ------
Net Income
Available for
Common Shares $ 56,616 146,915 $ 0.39 $ 217,692 139,255 $ 1.56
Add back:
Minority
interest in
earnings of
unitholders 2,968 7,619 14,399 9,204
Other
potentially
dilutive
shares 507 1,155
--------- ---------- --------- ----------
Diluted Net
Income
Available for
Common Shares $ 59,584 155,041 $ 0.38 $ 232,091 149,614 $ 1.55
========= ========== ====== ========= ========== ======
Reconciliation
to Funds From
Operations
("FFO")
Net Income
Available for
Common Shares $ 56,616 146,915 $ 0.39 $ 217,692 139,255 $ 1.56
Adjustments:
Depreciation
and
Amortization 314,952 277,691
Company
Share of
Joint
Venture
Depreciation
and
amortization 38,321 26,948
Earnings
from
depreciable
property
sales-wholly
owned (16,961) (121,072)
Earnings
from
depreciable
property
sales-share
of joint
venture (495) (6,244)
Minority
interest
share of
adjustments (16,527) (10,983)
--------- ---------- --------- ----------
Basic Funds From
Operations 375,906 146,915 $ 2.56 384,032 139,255 $ 2.76
Minority
interest in
earnings of
unitholders 2,968 7,619 14,399 9,204
Minority
interest
share of
adjustments 16,527 10,983
Other
potentially
dilutive
shares 507 1,155
--------- ---------- --------- ----------
Diluted Funds
From Operations $ 395,401 155,041 $ 2.55 $ 409,414 149,614 $ 2.74
========= ========== ====== ========= ========== ======
Contact Information: Contact Information: Investors: Shona Bedwell (317) 808-6169 Randy Henry (317) 808-6060 Media: Joel Reuter (317) 808-6137