Duke Realty Is a Cluttered REIT House

Atlanta-based financial services company Primerica (NYSE: PRI ), announced
Sept. 19 that it was moving its international headquarters in 2013 to a
344,476-square-foot building within Duke Realty 's (NYSE: DRE ) Legacy office
development. When completed, the development will possess close to 1 million
square feet of leasable office space. While it's indeed good news for the
REIT, it's not enough to get me to change my opinion about its stock. Quite
simply, there are better options available. Second-Quarter Results Duke has a
wonderful four-page investor update at its website discussing its business as of
the end of June 2011. Using the four-pager as a template, I'm going to compare
Duke to some of its peers. For instance, its diluted funds from operations in Q2
were 29 cents per share with a 17-cent dividend, which is a 58.6% payout.
Mack-Cali Realty (NYSE: CLI ), a similarly sized office REIT, had diluted FFO of
69 cents per share in the second quarter, paying out 65% or 45 cents per share.
As it stands today, their annual yields are identical. Also closely matched are
its occupancy rates. Duke's is 89.3% and Mack-Cali's is 88.1%. Where
there's a difference is in their capital structures. Mack-Cali has a
debt-to-capital ratio of 43.2% compared to 52.6% for Duke Realty. In addition,
Mack-Cali's fixed charge coverage ratio is 3.07 to 1.82 for Duke Realty. While
neither debt situation is outlandish, I tend to prefer companies with less. At
the end of the day, Mack-Cali is able to cover its debt obligations from
earnings better than Duke Realty is. Operating Margins Highwoods Properties
(NYSE: HIW ) recently acquired 2 million square feet of Class A office space
that will generate $27 million in net operating income in the next 12 months
from its $300 million investment. As a result, it raised its FFO guidance for
the year to between $2.52 and $2.60 per share. At its current price of $30.49,
it's trading at 12 times FFO. Duke's current multiple is 10 times FFO.
However, Highwoods multiple is more than justified by its operating margin. In
the second quarter, its FFO were $45.8 million from $117.1 million in revenue
for a 39% operating margin, while Duke Realty's FFO were $73.7 million from
$363.4 million in revenue for a 20.3% operating margin. Highwoods' operating
margin was 1,870 basis points higher in the latest quarter, and youd find the
difference isn't a one-time occurrence. I wrote about Highwoods in May 2009. I
found it to be an interesting company then, and I still do. Diversification
It's one of the most commonly discussed financial concepts. Duke Realty is
moving away from diversification in its asset strategy, preferring to allocate
more of its future capital to industrial properties and medical offices rather
than Class A office buildings. Currently, the majority of its rental income
splits evenly between general office and industrial space. Its new target is 60%
industrial, 25% general office and 15% medical office. It's not necessarily a
bad move considering the state of the office market but it does make me wonder
if there isn't a better, more diversified alternative. The SPDR Dow Jones
Global Real Estate ETF (NYSE: RWO ) gives you 213 real estate companies from
around the world including all three of the companies mentioned in this article
for a low annual expense ratio of 0.5% and a current dividend yield of 7.7%.
Frankly, unless you're absolutely in love with Duke Realty, it makes far more
sense investing in the ETF, which virtually eliminates your unsystematic or
company risk while at the same time obtaining a good source of income. Bottom
Line With so many people owning homes, I often wonder why people want to invest
in real estate companies in the first place. However, if your heart is set on
real estate, there are better alternatives available. As of this writing, Will
Ashworth did not own a position in any of the stocks named here.