Duke Realty Corporation (DRE - Free Report) is well positioned to benefit from an escalating demand for industrial properties by offering modern distribution facilities in strategic infill locations. Also, the medical office asset sale enabled the company to turn into a leading domestic pure-play industrial REIT. However, large-scale asset dispositions are expected to have a dilutive effect on earnings in the near term. Further, stiff competition and rate hike remain concerns.
In January 2018, Duke Realty reported fourth-quarter 2017 core funds from operations (FFO) per share of 30 cents, which came in line with the Zacks Consensus Estimate. However, the figure was lower than the year-ago tally of 31 cents. Total rental and related revenues of $179.4 million for the quarter jumped 11.5% on a year-over-year basis. Further, the figure surpassed the Zacks Consensus Estimate of $175 million. The results reflected growth in same-property net operating income on the back of solid rental increase.
Notably, the industrial real estate market has been witnessing elevated demand for modern, bulk distribution properties and warehouses. This demand is stemming from the growth of industries and companies opting for measures to improve supply chain efficiencies. This is helping the industrial real estate market to grow. Given Duke Realty’s solid capacity to offer such properties, it remains well poised to capitalize on this trend.
In fact, as part of its strategy to concentrate on industrial properties, in recent years, the company has made concerted efforts to lower exposure to suburban office assets. Further, it divested its medical office business in the prior year. Such efforts are particularly aimed at simplifying the company’s business model and turn it into a leading domestic pure play industrial REIT.
Moreover, solid dividend payouts remain arguably the biggest attraction for REIT investors. Duke Realty has raised its regular common dividend rate by 5.9%, 5.6% and 5.3% in fourth-quarter 2015, 2016 and 2017, respectively. Furthermore, the company contributed $70 million toward special dividend in 2015. Also, during fourth-quarter 2017, the company paid 85 cents as special dividends.
Nevertheless, as Duke Realty is enhancing its portfolio mix through continued divestitures, this included the significant disposition of suburban office assets and MOBs in recent times. While such efforts are a strategic fit for the long term, the near-term dilutive effect cannot be bypassed. Such moves tend to drag the company’s quarterly results and weigh on its profitability.
Though the company’s large development pipeline is encouraging for its future growth, it increases operational risks by exposing it to rising construction costs, entitlement delays and lease-up risks. The company also faces significant competition from developers, owners and operators of commercial real estates. This influences its ability to attract and retain tenants at relatively higher rents than its competitors.
Further, shares of Duke Realty have underperformed its industry in the past six months, declining 13.3% compared with the industry’s descend of 8.6%.
Currently, Duke Realty carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks Worth a Look
A few better-ranked stocks from the same industry include Arbor Realty Trust (ABR - Free Report) , Extra Space Storage Inc (EXR - Free Report) and Sotherly Hotels Inc. (SOHO - Free Report) . All three stocks carry a Zacks Rank of 2 (Buy).
Arbor Realty Trust’s Zacks Consensus Estimate for 2018 FFO per share have been revised 2.3% upward to 90 cents over the past month. Its share price has risen 10.2% in six months’ time.
Extra Space Storage’s FFO per share estimates for the current year have moved up 0.9% to $4.52 in a month’s time. Its shares have gained 11.7% over the past six months.
Sotherly Hotels’ FFO per share estimates for 2018 have been revised upward approximately 1% to $1.04 over the past month. The stock has gained 5.9% during the past six months.
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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