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Duke Realty (DRE) Meets Q4 FFO Estimates, Revenues Up Y/Y

Zacks Equity Research

Duke Realty Corporation’s DRE fourth-quarter 2018 core funds from operations (FFO) per share of 35 cents met the Zacks Consensus Estimate. Moreover, the figure came in a nickel ahead of the year-ago quarter figure of 30 cents.

Results indicate overall improved operations as well as increased investments in new industrial properties over the last year.

Rental and related revenues of $202.9 million in the reported quarter improved 13.1% on a year-over-year basis. The figure also marginally exceeded the Zacks Consensus Estimate of $202.8 million.

Duke Realty Corporation Price, Consensus and EPS Surprise

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

For 2018, the company reported core FFO per share of $1.33, reflecting year-over-year growth of nearly 7.3% from $1.24. This was backed by a 14.4% increase in revenues to $785.3 million.

Quarter in Detail

Duke Realty leased around 8.1 million square feet of space in the December-end quarter. Its tenant retention for the reported quarter was 87.9%. Moreover, the company registered same-property net operating income growth of 3.5% year over year. In fact, Duke Realty reported overall cash and annualized net effective rent growth related to new, and renewal leases of 7.0% and 25.3%, respectively.

As of Dec 31, 2018, the company’s total occupancy, including properties under development, was 93.8%, up 10 basis points (bps) from the prior-quarter end. In-service occupancy as of the same date was 96.3%, down 50 bps from the prior-quarter figure.

Notably, during the reported quarter, the company initiated three development projects, with expected costs of $101 million, aggregating 1.7 million square feet of space, which were 68% pre-leased. As of Dec 31, 2018, the company’s development pipeline was 55% leased and comprised 22 properties, totaling 9.5 million square feet, with projected costs of $749 million. Notably, during 2018, the company enhanced the amount of speculative space in its portfolio, both in service and under development.

Duke Realty exited 2018 with $17.9 million of cash and cash equivalents, down from $67.6 million as of Dec 31, 2017. The company does not have any significant debt maturities until 2021.

2019 Guidance

Duke Realty provided guidance for core FFO per share of $1.37-$1.43 for 2019. The Zacks Consensus Estimate for the same is currently pegged at $1.38.

The company expects same-property NOI growth of 3.25-4.75%, backed by solid rental rate increases. The guidance for acquisitions of properties is $100-$300 million and dispositions of non-strategic properties of $350 million to $550 million. The proceeds will be mainly used for funding development and acquisitions. In fact, management noted that development will continue at a solid pace and will not require additional equity financing. Particularly, guidance for development starts from $600 million to $800 million.

Dividend Update

Concurrent with its earnings release, Duke Realty announced a quarterly cash dividend on common stock of 21.50 cents per share, denoting 86 cents per share on an annualized basis. The dividend for the fourth quarter will be paid on Feb 28 to shareholders of record as of Feb 14, 2019.

Our Viewpoint

We are encouraged with the year-over-year improved performance of Duke Realty in the October-December period. Notably, the industrial real estate market is currently enjoying elevated demand for logistics infrastructure amid improving economy and e-commerce boom. Given Duke Realty’s solid capacity, the company remains well poised to capitalize on this trend.

The company has been enhancing the portfolio mix through continued divestitures. While such efforts are fit for the long term, the near-term dilutive effect will drag its quarterly results and weigh on near-term profitability. Further, amid rising construction costs, Duke Realty’s large development pipeline exposes it to operational risks. Also, with rising supply of industrial real estate space, there is lesser scope for robust rent and occupancy growth in the near term. Further, rate hike remains a drag.

Currently, Duke Realty carries a Zacks Rank #4 (Sell).

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

We now look forward to the earnings releases of other REITs like Alexandria Real Estate Equities, Inc. ARE, AvalonBay Communities, Inc. AVB, and Apartment Investment and Management Company AIV, which are slated to report their quarterly numbers on Feb 4.

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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