On Feb 12, 2013, we reiterated our long-term recommendation on Duke Realty Corporation (DRE) at Neutral. This reflects the company’s strong leasing activity, healthy balance sheet with adequate liquidity and strategic efforts to reposition its portfolio. However, short-term revenue headwinds arising out of the repositioning moves and reduced income from service operations remain matters of concern.
Duke Realty’s expert local operating teams and strategically located, high-quality properties helped it realize superior performances in 2012. It achieved its highest in-service occupancy in more than a decade (93.0% as of Dec 31, up 50 basis points (bps) for the quarter and 230 bps from the year-end 2011).
This reflected great leasing activity and limited speculative development starts. Going forward, we believe that its efficient operating platform will help post such improved results and this, in turn, would help boost its financial results.
Moreover, in 2012, in agreement with its repositioning strategy, the company began new development starts with $520 million, acquired over $800 million of industrial and medical office properties, as well as completed $153 million in dispositions. We believe that this portfolio repositioning is likely to improve the internal growth metrics, enabling the company to emerge stronger once the real estate markets fully recover.
In addition, the medical office business continues to benefit from the ongoing structural changes in the industry and all healthcare providers are adapting to the Affordable Care Act implementation. As such, Duke Realty is experiencing strong demand in its medical office business and this is expected to help augment its top line going forward.
However, Duke Realty’s fourth quarter 2012 core FFO of 27 cents per share was in line with the Zacks Consensus Estimate but fell 3 cents from the prior-year quarter, reflecting lower third party construction fees and short-term dilution effect arising out of the repositioning moves. We believe that the short-term revenue headwinds will limit the stock’s upside potential to some extent.
Following the release of the fourth quarter and full year 2012 results, the Zacks Consensus Estimate for full year 2013 has gone down 0.9% to $1.07 per share with 2 estimates going north and 3 going south.
Also, the Zacks Consensus Estimate for full year 2014 fell 1.8% to $1.12 per share as 2 estimates were revised upward while one estimate moved down. With the Zacks Consensus Estimates going down for both full year 2013 and 2014, the company now has a Zacks Rank #4 (Sell).
Other Stocks to Consider
REITs that are currently performing well include Terreno Realty Corp. (TRNO), having a Zacks Rank #1 (Strong Buy) as well as Hersha Hospitality Trust (HT) and Medical Properties Trust Inc. (MPW), both carrying a Zacks Rank #2 (Buy).
Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
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