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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings assigns a 'BBB-' rating to the $300 million aggregate principal amount of 3.875% senior unsecured notes due Oct. 15, 2022 issued by Duke Realty Limited Partnership, a subsidiary of Duke Realty Corp. (NYSE: DRE). The notes were issued at 99.584% of principal value to yield 3.925% to maturity.

Net proceeds from the offering are expected to be used to repay outstanding debt with near-term maturities, including balances on the revolving credit facility, and for general corporate purposes.

Fitch currently rates DRE and its operating partnership as follows:

Duke Realty Corp.

--Issuer Default Rating (IDR) 'BBB-';

--Preferred stock 'BB'.

Duke Realty Limited Partnership

--IDR 'BBB-';

--Senior unsecured notes 'BBB-';

--Unsecured revolving credit facility 'BBB-'.

The Rating Outlook is Stable.

Fitch anticipates 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 797 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 17.2% of annual base rents at June 30, 2012. Lease expirations are less than 13% of the total annual base rent in any given year, with just 3.4% expiring for the remainder of 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 continues to shift the composition of the portfolio.

The company's leverage, defined as net debt to recurring operating EBITDA, was approximately 7.1 times (x) at June 30, 2012, compared with 6.9x at Dec. 31, 2011 and 7.2x at Dec. 31, 2010. Fitch expects leverage to trend toward the mid-6.0x range, which is appropriate for the 'BBB-' rating.

The company has moderately increased its development pipeline recently. In-process development (including joint ventures) represented 5.5% of undepreciated book assets as of June 30, 2012, compared with 2.6%, 1.3% and 1.4% as of Dec. 31, 2011, Dec. 31, 2010 and Dec. 31, 2009, respectively. Remaining cost to be spent was 3.2% of total undepreciated assets as of June 30, 2012. Notably, the majority of the developments are build-to-suit projects and MOBs, thus minimizing lease-up risk, which Fitch views positively.

DRE has adequate liquidity and financial flexibility. As of June 30, 2012, the company had 449 unencumbered properties (excluding eleven wholly owned properties under development) with a gross book value of $5.1 billion. Unencumbered asset coverage of unsecured debt based on applying an 8.5% cap rate to unencumbered annualized stabilized NOI was appropriate for the 'BBB-' IDR at 1.9x as of June 30, 2012. The weighted average cap rate for asset purchases and sales since Jan. 1, 2011 is approximately 7.6%.

Pro forma the notes issuance, the company has a moderate liquidity shortfall of $196 million for the period June 30, 2012 - Dec. 31, 2014, resulting in a liquidity coverage ratio of 0.9x. Assuming maturing secured debt is refinanced at 80% of existing balances, liquidity coverage is adequate at 1.1x. Liquidity coverage is defined as 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).

DRE's fixed-charge coverage ratio is low for the rating. Fixed-charge coverage (defined as recurring operating EBITDA, less recurring capital expenditures and straight-line rent adjustments, divided by total interest incurred and preferred dividends) was 1.5x for the 12 months ended June 30, 2012, up slightly from 1.4x in 2011 and 1.4x in 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.

Suburban office fundamentals remain weak but are moderating, as evidenced by net effective rents on renewals declining 3.4% in 2Q'12 and net effective rental rates on new leases remain weak at $12.83 per square foot (psf) in 2Q'12 compared with $12.89 psf in 1Q'12, $12.05 psf in 2011, $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 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,' 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:

--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 6.0x (as of June 30, 2012, leverage was 7.1x);

--Fitch's expectation of fixed-charge coverage sustaining above 2.0x (latest 12-month coverage was 1.5x as of June 30, 2012).

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);

--'Recovery Rating and Notching Criteria for REITs' (May 3, 2012);

--'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).

Applicable Criteria and Related Research:

Parent and Subsidiary Rating Linkage

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552 ]

Recovery Ratings and Notching Criteria for Equity REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677739 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=671869 ]

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460 ]

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