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Duke Realty (DRE) to Post Q2 Earnings: What's in the Cards?

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Duke Realty Corp.  is scheduled to report second-quarter 2018 results on Jul 25, after the market closes. The company’s results will likely reflect year-over-year growth in its funds from operations (FFO) per share and revenues.

In the last reported quarter, this industrial real estate investment trust (REIT) surpassed FFO per share estimates by a whisker. Results witnessed same-property net operating income growth amid healthy leasing activity.

The company exceeded the Zacks Consensus Estimate in three out of the trailing four quarters and met estimates in one occasion, with the average beat being 3.4%. The graph below depicts this surprise history:

Duke Realty Corporation Price and EPS Surprise
 

Duke Realty Corporation Price and EPS Surprise | Duke Realty Corporation Quote

Will the stock’s rally continue as it posts second-quarter earnings? Let’s see how things are shaping up.

Factors That Might Influence Q2 Results

Duke Realty continues to grow its industrial portfolio with modern distribution facilities in key markets. The company’s growth on the East and West Coasts is encouraging. Notably, it reported ground breaking of facilities at Flower Mound, TX, Inland Empire East and the Central DuPage submarkets among others, during the April-June quarter.

As demand for modern distribution facilities has been getting a significant boost amid e-commerce boom and recovering economy, companies are now compelled to enhance and renovate their distribution and production platforms to support the e-commerce business and address a large customer base. This is also giving a significant impetus to REITs like Terreno Realty (TRNO - Free Report) , Prologis Inc. (PLD - Free Report) and Liberty Property Trust .

As for Duke Realty, itssolid capacity to leverage on this favorable trend has helped it achieve full occupancy and witness active leasing across a number of the company’s properties. 

Nevertheless, as recovery in the industrial market has continued for long, an uptick in development and supply levels remains a concern. In fact, per an article by CBRE Group, development activity is also gathering steam in this sector and therefore, the demand-and-supply gap reduced to 22 million square feet of space for the 12-month period ended June 2018, from the 65 million square feet of area reported in the prior year.

Further, new supply of 48.9 million square feet of space was delivered in the quarter, reflecting a 17.8% jump sequentially and 7.5% rise year over year. Increase in supply leads to lesser scope for rent and occupancy growth.

Hence, the company’s new facility developments may be unable to attract and retain tenants at relatively higher rents, affecting long-term growth. Additionally, a large development pipeline heightens operational concerns by exposing the company to escalating construction costs, entitlement delays and lease-up risks.  

In addition, over the past month, the Zacks Consensus Estimate of FFO per share for the second quarter remained unchanged at 33 cents, underlining lack of any solid catalyst.

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.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Duke Realty is 0.13%.

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

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price Performance and Valuation

Shares of Duke Realty have rallied 9.9% in the past six months, outperforming the industry’s growth of 3.9%.


 

A rally in its share price has made the stock expensive as evident from its trailing 12-month price-to-FFO ratio. The ratio currently stands at 23.2 and compares unfavorably with what the industry witnessed over the past year. The figure is higher than the industry’s present ratio of 16.37, and also above the high-end of the valuation range over the past year. Therefore, investors might not want to pay any further premium.

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

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