DRE Trades Suburban Portfolio to Starwood Capital

INDIANAPOLIS—Duke Realty Corp. said Wednesday afternoon it's exiting several of its suburban office markets, agreeing to sell a portfolio to a Starwood Capital Group-led venture for $1.1 billion. Chairman and CEO Denny Oklak says the sale represents “a continuation of our strategy to increase our focus on bulk industrial and medical office properties and to reduce our investment in suburban office assets.”

The 62-building portfolio, including one currently under development, includes all of DRE's wholly owned suburban office properties in the Nashville, Raleigh, South Florida and St. Louis markets. It totals 6.9 million square feet, as well as 57 acres of undeveloped land in Raleigh and South Florida.

The portfolio, which Greenwich, CT-based Starwood Capital is buying in partnership with affiliates of Vanderbilt Partners and Trinity Capital Advisors, is currently 91% leased, compared to a companywide average of 95.3% occupancy at the end of 2014, and the buyers will assume responsibility for leasing and management. DRE will provide $200 million of seller financing, and the portfolio is encumbered by $40 million of secured debt that will be repaid at closing.

Oklak says that over the past year, DRE “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.” 

Analysts from RBC Capital Markets gave plaudits to DRE's divestiture of the properties. “This sale should further advance repositioning” of the REIT, wrote analyst Mike Salinsky and associate Neil Malkin in a note to investors. They added, however, that “a mixed reaction is expected” from the market, due to DRE's more moderate same-store growth forecast of 2% to 4% this year, compared to 4.4% achieved in 2014.