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Duke Realty earnings fall, dividend cut in half

by Kate Shellnutt
Jan 29, 2009

Fourth quarter earnings of Duke Realty Corp., an Indianapolis-based real estate investment trust that owns dozens of offices and industrial centers in Chicago suburbs, fell 63 percent, and the still-slowing commercial real estate market forced the company to take cost-cutting measures for the year ahead.

Shares dropped 17.7 percent, or $2.15, to $9.96 as the company reduced its dividend by half and projected guidance for 2009 that fell below analyst expectations. Despite the grim outlook, Duke Realty has been able to maintain high occupancy rates in its properties, which enabled its fourth quarter funds from operations, or FFO, to beat the consensus estimate.

The industry’s largest office, industrial and health care real estate investment company, Duke Realty reported a profit of $22.8 million, or 15 cents per diluted share, for the three months ended Dec. 31, compared with $62 million, or 40 cents, in the year-earlier period. 

FFO available for common shareholders, a common measure of REIT performance, fell to $113 million, or 71 cents per diluted share, from $123.5 million, or 80 cents per diluted share. Analysts estimated 63 cents.

Revenues from continuing operations slipped to $264.5 million from $268.8 million.

The trust, which gains nearly tax-exempt status if it distributes at least 90 percent of its taxable income to shareholders as dividends, cut its dividend from $1.94 last year to an annual rate of $1 in 2009, the first reduction since the company became a publicly held trust 16 years ago.

Jeremy Glaser, an analyst with Morningstar Inc. in Chicago, called the cut, which allows Duke to keep $150 million in cash, a “prudent move.”

“It allows them to retain capital while still paying a pretty nice yield,” he said. As of Wednesday, Duke Realty’s 2009 dividend yield was about 8 percent, down from 2008’s 18 percent yield, as of Dec. 31. The company’s yield remains in line with those of fellow real estate investment trusts; the index compiled by the National Association of Real Estate Investment Trusts that includes all REITs offers a 8.8 percent yield.

During 2008, the company began phasing out of the retail and build-to-suit sector, cut 19 percent of its workforce, eliminated operations in four cities and froze management pay. In an earnings conference Thursday, Duke Realty executives echoed the mantra, “blend, extend and don’t spend,” saying they plan to continue cost-cutting in the year ahead.

Duke Realty predicts funds for operations between $1.85 and $2.15 a share for 2009, below analyst estimates of $2.26. The company’s outlook signals that the commercial real estate industry will continue to slow.

“We anticipate continued slowing of our business through 2009 and into 2010,” CEO Dennis Oklak said during a conference call.

The company’s full-year FFO guidance for 2009 falls 40 cents below last year’s $2.55. Total FFO in 2008 was $375.9 million, down from $384 million, or $2.74 per diluted share.

“Guidance assumptions suggest a very challenging 2009,” said Wilkes Graham, an analyst with Friedman, Billings, Ramsey & Co. who rates the stock “underperform.”

Annual net income for Duke plummeted 90 percent to $59.6 million, or 38 cents per diluted share, in 2008, compared with $232 million, or $1.55 per diluted share. the year before.  Revenue from continuing operations rose to $996 million from $951.4 million.