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Analyst Blog

On Jul 10, 2013, we reiterated our long-term recommendation on Duke Realty Corporation (DRE - Analyst Report) at Neutral. This is based on the company’s strong same-property performance, healthy balance sheet with adequate liquidity and strategic efforts to reposition its portfolio. However, we remain concerned about Duke Realty’s large development pipeline, which might elevate its operational risks.

Why the Neutral Stance?

Duke Realty’s expert local operating teams and strategically located high-quality properties helped it deliver a superior performance in the first-quarter of 2013. The company’s in-service occupancy stood at 92.1% in the quarter. This reflects great leasing activity and limited speculative development starts. Moreover, an efficient operating platform is expected to improve its financials going forward.  

Additionally, Duke Realty continues to reposition its portfolio in an attempt to concentrate in areas where it has a strong presence. In the first-quarter of 2013, the company invested $139 million in new development starts, acquired over $30 million of industrial and medical office properties as well as completed $223 million in dispositions. This is expected to improve the internal growth metrics, which would enable it to emerge stronger once the real estate markets recover fully.

However, Duke Realty has a large development pipeline, which increases operational risks exposing it to rising construction costs, entitlement delays, and lease-up risk. Moreover, continued pressure on occupancy and rents, along with Duke Realty’s goal to sell substantial suburban office assets and de-leverage its balance sheet, are likely to weigh on earnings growth in the subsequent quarters.

The Zacks Consensus Estimate for 2013 and 2014 remained unchanged at $1.08 and $1.14 per share, respectively, over the last 60 days.

The Zacks Consensus Estimate for the upcoming quarter is pegged at 27 cents per share. The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for Duke Realty is +3.85% for the second quarter. This, along with its Zacks Rank #3 (Hold), makes it likely for the company to report a positive earnings surprise.

Other Stocks to Consider

Some better performing REITs include Sunstone Hotel Investors Inc. (SHO - Snapshot Report), Terreno Realty Corp. (TRNO - Snapshot Report) and Winthrop Realty Trust (FUR - Snapshot Report). All these carry a Zacks Rank #1 (Strong Buy).

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