S&P Lifts Outlook on Duke Realty (DRE) to Positive; Sees Improved Business Mix

Standard & Poor's Ratings Services revised its outlook on Duke Realty Corp. (NYSE: DRE) and its operating partnership, Duke Realty L.P. (collectively, Duke), to positive from stable. At the same time, we affirmed our 'BBB' corporate credit rating and 'BBB' issue-level rating on the company's senior unsecured notes.

"The revised outlook reflects what we see as an improved business mix that is now more narrowly focused on industrial and medical office buildings (MOBs) after Duke sold the majority of its suburban office portfolio. The revised outlook also reflects our expectation that Duke will continue to deleverage and strengthen its credit metrics over the next two years," said credit analyst Michael Souers. "We expect the company to predominantly use dispositions to fund acquisitions and development activity. While there is a near-term drag on EBITDA related to the sale of assets and funding non-income-producing development, we expect Duke to also use the dispositions to repay some existing debt."

Our expectation that the company will achieve and sustain the recent improvement in its key credit metrics supports the positive outlook. Favorable macroeconomic trends within the industrial and MOB industries, along with the completion of well-leased development should support EBITDA growth over the next two years. We also expect Duke to remain committed to a more conservative development funding strategy, financed primarily with asset sales and equity.

We would consider an upgrade if the company's repositioned portfolio appears more stable and resilient through an economic downturn, leading to a stronger assessment of the business risk profile or if the company continues to lower leverage such that debt to EBITDA declines to the mid-5x area with debt to undepreciated capital below 40%

We could revise the outlook back to stable if the company faces any near-term operating challenges or fails to lease up their development pipeline. Moreover, any reversal in the company's recent improvement to its key credit metrics, with debt to EBITDA rising back above 6x for a sustained period, would also likely cause an outlook change back to stable.

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