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Why an Earnings Beat Is Unlikely for Duke Realty (DRE) in Q4

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Duke Realty Corp. is scheduled to report fourth-quarter and 2017 results on Jan 31, after the market closes. Revenues are expected to grow sequentially.

Last quarter, this commercial real estate investment trust (REIT) delivered a positive earnings surprise of 3.5%. Results witnessed same-property net operating income growth on the back of robust rental growth. Nonetheless, total occupancy declined sequentially.

The company exceeded the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being nearly 6%. The graph below depicts this surprise history:

Duke Realty Corporation Price and EPS Surprise

Notably, Duke Realty’s fundamental strength has helped its shares gain 8.5% in the past 12 months, outperforming the 3% gain recorded by the industry.

Will the stock’s rally continue post fourth-quarter earnings release? Let’s see how things are shaping up.

Earnings Whispers

Our proven model does not conclusively show that Duke Realty will likely beat estimates this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. However, that is not the case here as you will see below.

Zacks ESP: The Earnings ESP for Duke Realty is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Duke Realty has a Zacks Rank #4 (Sell).

This combination of a 0.00% ESP and a Zacks Rank #4 makes it difficult to predict a beat this season.

Factors That Might Influence Q4 Results

In recent years, Duke Realty has made concerted efforts to enhance its industrial portfolio. This augurs well because the industrial-asset category has been grabbing attention as it is experiencing high demand, with the economy and job market displaying signs of recovery and the manufacturing environment remaining healthy.

Amid an e-commerce boom, growth in industries and companies opting for consolidation of operations for improving supply chain efficiencies, demand for logistics infrastructure and efficient distribution networks have been increasing. This is helping the industrial real estate market to grow. Given Duke Realty’s solid capacity to offer modern, bulk distribution properties, the company remains well poised to capitalize on this trend.

Duke Realty has made rigorous efforts to lower its suburban office assets as part of its strategy to concentrate on industrial assets. Subsequently, in May 2017, the company inked a deal to sell its MOB portfolio for a price of $2.8 billion. The company generated $2.45 billion in proceeds in the second quarter, through this sale. Further, in the third quarter, Duke Realty substantially accomplished the sale of seven of the nine medical office buildings, spanning 519,000 square feet. Such efforts are aimed at simplifying the company’s business model and turn it into a leading domestic pure play industrial REIT.

While such streamlining efforts are strategic fit for the long term, the near-term dilutive effect cannot be bypassed. In fact, such short-term impact will likely drag the company’s quarterly results.

Over the past month, the Zacks Consensus Estimate of funds from operations (FFO) per share for the fourth quarter remained unchanged at 30 cents, reflecting lack of any solid catalyst. Also, it points to a year-over-year decline of 3.2%.

Further, the Zacks Consensus Estimate for fourth-quarter revenues is pegged at $175 million, indicating a decline of 14.3% year over year.

For full-year 2017, the Zacks Consensus Estimate for revenues stands at $736.8 million. The consensus estimate for FFO per is $1.24, reflecting a year-over-year improvement of 3.3%. Further, management expects core FFO per share in the range of $1.21-$1.25.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows these have the right combination of elements to report a positive surprise this quarter:

Alexandria Real Estate Equities (ARE - Free Report) , scheduled to release earnings on Jan 29, has an Earnings ESP of +0.33% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

CubeSmart (CUBE - Free Report) , slated to release fourth-quarter results on Feb 15, has an Earnings ESP of +1.10% and a Zacks Rank #3.

Diamondrock Hospitality Company (DRH - Free Report) , scheduled to report quarterly numbers on Feb 28, has an Earnings ESP of +4.76% and a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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