On Jan 2, 2014, we reinstated our long-term Neutral recommendation on Duke Realty Corporation (DRE). This is based on the company’s decent third-quarter results, strategic portfolio restructuring activity and a healthy balance sheet position. Yet stiff competition and a large development pipeline remain our plausible concerns. Also, the diluting impact from the suburban office asset divestitures cannot be ignored.
Why the Reiteration?
With the improvement in industrial sector, Duke Realty is repositioning its portfolio to strengthen its bulk industrial business in key markets. Moreover, the company is making effort to enhance its medical office portfolio. Notably, the introduction of the Affordable Act is likely to brighten growth prospects for Duke Realty as it will widen the insured people bracket. This will further boost the demand for new outpatient facilities.
Notably, aided by improved rental operations and higher net operating income, Duke Realty’s third-quarter 2013 core funds from operations (:FFO) of 28 cents per share was 2 cents higher than the year-ago figure and in line with the Zacks Consensus Estimate.
Despite these positives, the company faces stiff competition from commercial property developers and its large development pipeline increases operational risks. In addition, 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 near term.
Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO per share remained stable at $1.08. However, the Zacks Consensus Estimate for 2014 FFO per share dipped 1.8% to $1.12. Consequently, Duke Realty carries a Zacks Rank #3 (Hold).
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