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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following credit ratings for Duke Realty Corp. (NYSE: DRE) and its operating partnership, Duke Realty Limited Partnership, (collectively, DRE or the company):

Duke Realty Corp.
--Issuer Default Rating (IDR) at 'BBB-';
--Preferred stock at 'BB'.

Duke Realty Limited Partnership
--IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Senior unsecured exchangeable notes at 'BBB-';
--Unsecured revolving credit facility at 'BBB-'.

The Rating Outlook is Stable.

The affirmations reflect Fitch's view that the company's credit profile will remain consistent with a 'BBB-' rating in the near-to-medium term. Leverage is appropriate for the rating category. The rating also takes into account the company's large pool of diversified industrial, office, and medical office building (MOB) properties, solid unencumbered asset coverage of unsecured debt, and adequate liquidity position. The ratings are balanced by a fixed-charge coverage ratio that is low for the rating category and continued challenging suburban office fundamentals, even as DRE continues to shift its portfolio away from suburban office to a higher percentage of industrial properties and MOBs.

The company has a diversified portfolio of 748 bulk distribution, suburban office, MOB, and retail properties located across 18 markets, which Fitch views favorably from a property segment and geographical diversification standpoint.

The company's portfolio also benefits from a highly diversified tenant base and well-staggered lease expiration schedule, limiting tenant credit risk and lease rollover risk. DRE's largest 20 tenants represented just 17.4% of annual base rents at Dec. 31, 2011. Lease expirations are less than 12% of the total annual base rent in any given year, with just 7.4% expiring in 2012, indicating long-term recurring cash flow across the portfolio.

DRE continues to execute on its strategic plan, which entails increasing the exposure to industrial and MOB assets while reducing the exposure to suburban office. Fitch has a negative outlook on suburban office fundamentals, and a stable outlook on industrial and healthcare fundamentals, and as such, views the company's repositioning strategy favorably. However, there is potential for near-term EBITDA dilution from asset purchases and sales as the company shifts the composition of the portfolio.

The company's leverage, defined as net debt to recurring operating EBITDA, was approximately 7.0 times (x) at Dec. 31, 2011 (after adjusting for the timing of the asset sale to Blackstone in December 2011), compared with 7.2x at Dec. 31, 2010 and 6.7x at Dec. 31, 2009. Fitch expects leverage to trend toward the mid 6.0x range, which is solid for the 'BBB-' rating. In a stress case not anticipated by Fitch in which same store net operating income (NOI) declines 7.5% in 2012 and 9.0% in 2013, leverage would be 9.6x in 2013, which would be more consistent with a lower rating.

The company has moderately increased its wholly owned development pipeline recently. However, development represented just 2.6% of undepreciated book assets as of Dec. 31, 2011, compared with 1.3% and 1.4% as of Dec. 31, 2010 and Dec. 31, 2009, respectively. Remaining cost to be spent was just 2.1% of total undepreciated assets as of Dec. 31, 2011. The company's new development starts will focus on build-to-suit projects and MOBs, thus minimizing lease-up risk, which Fitch views positively.

DRE has adequate liquidity and financial flexibility. As of Dec. 31, 2011, the company had 432 unencumbered properties with a gross book value of $4.8 billion. Unencumbered asset coverage of unsecured debt based on applying an 8.5% cap rate to unencumbered NOI was adequate for the 'BBB-' IDR at 1.9x as of Dec. 31, 2011. The average cap rate for asset purchases and sales over the past two years has been approximately 8.0%.

Sources of liquidity (unrestricted cash, availability under the unsecured revolving credit facility, and projected retained cash flow from operating activities after dividends) divided by uses of liquidity (pro rata debt maturities, expected recurring capital expenditures, and remaining nondiscretionary development costs) was 1.0x for the Jan. 1, 2012 - Dec. 31, 2013 period, or 1.3x, assuming DRE is able to refinance mortgage debt at 80% of the maturing amount during this period.

DRE's fixed-charge coverage ratio is low for the rating. Coverage (defined as recurring operating EBITDA, less recurring capital expenditures and straight-line rent adjustments, divided by total interest incurred and preferred dividends) was 1.4x in 2011, unchanged from 2010. Coverage has remained in the 1.4x to 1.6x range since 2008, and Fitch anticipates that fixed-charge coverage will improve moderately through 2014 to 1.8x, driven by moderate NOI growth and reduced preferred dividends due to recent preferred redemptions. In addition, the company has $178 million of 8.375% series O preferreds that become redeemable in 2013, which DRE may redeem to further improve coverage.

In a stress case not anticipated by Fitch, in which same store NOI declines 7.5% in 2012 and 9.0% in 2013, coverage would be 1.0x in 2013, which would be more consistent with a lower rating.

Suburban office fundamentals remain weak, as evidenced by an occupancy decline to 85.4% at Dec. 31, 2011 from 86.4% at Dec. 31, 2010 for DRE's stabilized office portfolio. In addition, net effective rental rates on new leases continue to decline and were $12.05 per square foot (psf) in 2011, down from $12.56 psf in 2010 and $13.03 in 2009. Fitch anticipates that DRE's suburban office portfolio will continue to face headwinds in the near term, driven by continued weak rental rate growth and high leasing costs.

The Stable Rating Outlook is based on Fitch's expectation that leverage will stabilize in the 7.0x range in the near term and then trend lower to the mid 6.0x range in 2014, that coverage will improve moderately to 1.7x in 2013 and 1.8x in 2014, and that the company will maintain adequate liquidity.

The two-notch differential between DRE's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB-' IDR. Based on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' dated Dec. 15, 2011 and available on Fitch's Web site at [ www.fitchratings.com ], these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

The following factors may have a positive impact on the ratings and/or Rating Outlook:

--Net debt to recurring operating EBITDA sustaining below 6.0x (as of Dec. 31, 2011, leverage was approximately 7.0x after adjusting for the timing of the Blackstone transaction);
--Fixed-charge coverage sustaining above 2.0x (latest 12-month coverage was 1.4x as of Dec. 31, 2011).

The following factors may have a negative impact on the ratings and/or Rating Outlook:

--Fixed-charge coverage sustaining below 1.3x;
--Net debt to recurring operating EBITDA sustaining above 8.0x;
--AFFO (adjusted funds from operations) payout ratio sustaining above 100%.

Additional information is available at [ www.fitchratings.com ]. The issuer did not participate in the rating process or provide additional information beyond its available public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 15, 2011);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011);
--'Recovery Rating and Notching Criteria for REITs' (May 12, 2011).

Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
Parent and Subsidiary Rating Linkage
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210 ]
Recovery Rating and Notching Criteria for Equity REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]

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