Duke Reduces Volume in Suburban Office Sector

Duke Realty Corp. has been quite vocal over the years about its strategy of transforming its portfolio into majority industrial and exiting many of its suburban office markets, and once again it is putting its money where its mouth is with its latest disposition.
Sawgrass Pointe I in South Florida, part of the 62-portfolio sold to Starwood

Sawgrass Pointe I in South Florida, is part of the 62-portfolio sold to Starwood.

Duke Realty Corp. has made no secret of its long-term strategy to transform its portfolio into majority industrial and medical office, while exiting many of its suburban office markets. And now it has once again proven that notion by selling 62 of its properties to Starwood Capital Group.

The traded office portfolio totals 6.9 million square feet and 57 acres of undeveloped land. The 62 buildings include all of the company’s wholly-owned suburban office properties located in Nashville, Raleigh, South Florida and St. Louis.

An affiliate of Greenwich, Conn.-based Starwood Capital Group, in a joint venture with affiliates of Vanderbilt Partners and Trinity Capital Advisors, agreed to buy the portfolio for $1.12 billion.

The properties are 91 percent leased and the buildings have an average age of 15.5 years. The portfolio is encumbered by $40 million of secured debt that will be repaid at closing. The sale of the portfolio is expected to generate a net book gain. The buyer will assume leasing and property management responsibilities. As part of the transaction, the Indianapolis-based REIT will provide seller financing of $200 million, in the form of a first mortgage on a portion of the underlying properties, which will bear interest at LIBOR plus 1.5 percent and have a maturity date of Dec. 31, 2016. The note will be pre-payable without penalty beginning Jan. 1, 2016 and will be collateralized by properties with an approximate 75 percent loan to value ratio, according to a news release.

“In 2009, we set out a strategic plan to re-position the company’s overall portfolio to be 60 percent industrial assets, 25 percent suburban office assets and 15 percent medical office properties. At the end of 2013 we achieved those goals in accordance with our plan. This re-positioning was very well received by our shareholders as indicated by the outperformance of our share price in 2014 as compared to our peers,” Denny Oklak, Duke chairman & CEO said in the release. “In 2014, we continued to dispose of assets that we did not consider strategic to us in the long-term and which we believed the open market was valuing at a higher value than their strategic importance to us. This sale is an example of just such a transaction.”

Duke intends to use the proceeds of the sale to fund its imminent development projects, including build-to-suit medical offices and industrial properties heading into 2015, said  Duke COO Jim Connor during a Thursday conference call.

“The transaction will allow us to de-lever our balance sheet further which has also been a strategic goal since 2009. In addition, the transaction allows us to focus on our primary strategy of growing the company through development of new bulk industrial and medical office properties throughout the country,” Oklak conluded.

Back in December 2011, Duke sold a $1.1 billion geographically diverse portfolio of suburban office assets to an affiliate of the Blackstone Group L.P.