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What's in the Offing for Duke Realty's (DRE) Q4 Earnings?

Zacks Equity Research

Duke Realty Corp. DRE is scheduled to report fourth-quarter and 2019 results on Jan 29, 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’s (REIT) core FFO per share of 37 cents came in line with the Zacks Consensus Estimate. Results indicated overall improved operations as well as increased investments in new industrial properties.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on two occasions and met estimates in the other two, the average beat being 1.5%. The graph below depicts this surprise history:

Duke Realty Corporation Price and EPS Surprise

Duke Realty Corporation Price and EPS Surprise

Duke Realty Corporation price-eps-surprise | Duke Realty Corporation Quote

Duke Realty’s guidance for 2019 core FFO per share is $1.42-$1.46. Further, it expects same-property net operating income (NOI) growth of 4.4-4.8%.

Let’s see how things have shaped up.

The industrial real estate asset category has been firing on all cylinders, of late, and continues to play a pivotal role in a rising e-commerce market, transforming the way consumers shop and receive their goods. Further, services like same-day delivery are gaining traction and last-mile properties in high-income urban areas are witnessing solid pricing, occupancy and growth in rentals.

Moreover, demand for distribution space has been rising, as e-commerce continues to expand to sectors like grocery and furnishing. Also, apart from e-retail, companies are taking the omni-channel plunge and making strategic moves to boost their supply-chain efficiencies, thereby propelling demand for logistics infrastructure and efficient distribution networks.

This is encouraging industrial REITs to employ sophisticated technologies at their logistics centers to achieve efficiency in trans-shipment and delivery processes.

Per a report from Newmark Knight Frank, the robust demand has continued to push pricing higher, while the vacancy rate hovers near the cyclical low. Particularly, at fourth-quarter 2019, average industrial asking rent across the United States measured $7.41 per square feet, denoting 4.5% year-over-year growth as well as the highest quarterly average recorded this cycle. In fact, industrial rents have improved each quarter for the past five years, suggesting the resilience in this asset class.

However, this environment of stout growth has attracted many developers, resulting in an increase in construction pipeline and delivery of industrial space. Developers added 74.1 million square feet of industrial space during fourth-quarter 2019, bringing the 2019 total to a new cyclical-high of 254.4 million square feet. Continued groundbreaking activity and cyclical-high construction activity witnessed in the December-end quarter indicate supply levels will remain elevated in the near term.    

This has impacted vacancy rates and net absorption. In fact, vacancy rate of 5.2% at the end of 2019, expanded 10 basis points (bps) from the prior quarter and 30 bps, year on year. Also, absorptions aggregated 190.8 million square feet, declining from the 261.8 million square feet recorded in 2018.

As for Duke Realty, its solid capacity to bank on this favorable trend is likely to have helped the company witness active leasing and healthy rent levels across a number of properties in the December-end quarter. The company focuses on having facilities in major MSAs, and key trucking, rail, air cargo and shipping corridors. Such locations help generate solid demand from e-commerce and traditional distribution customers for its industrial properties.

In November, the company entered into a long-term lease agreement for one of its logistic buildings in Perris, CA.The company secured a full-building pre lease for the 1 million-square-foot building at 4375 N. 

The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $216.6 million, indicating a year-over-year improvement of 6.8%.

Nonetheless, the estimate for fourth-quarter general contractor and service fee revenues is $2.9 million, indicating a steep decline from the quarter-ago tally of $29.5 million.

Amid these, prior to the fourth-quarter earnings release, there is lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate of FFO per share for the fourth quarter remained unchanged at 38 cents, over the past 30 days. Nevertheless, the figure suggests a year-over-year increase of 8.6%.

For the full year, the Zacks Consensus Estimate for FFO per share remained unrevised at $1.44 over the past month. Nevertheless, the figure indicates an 8.3% increase year on year.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Duke Realty this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Duke Realty is 0.00%.

Zacks Rank: Duke Realty currently carries a Zacks Rank of 4 (Sell)

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Healthpeak Properties, Inc. PEAK, scheduled to release earnings on Feb 11, has an Earnings ESP of +1.54% and carries a Zacks Rank of 3, at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Host Hotels & Resorts, Inc. HST, slated to report quarterly figures on Feb 19, has an Earnings ESP of +1.52% and carries a Zacks Rank of 3, currently.

Rexford Industrial Realty REXR, expected to release October-December quarter results around Feb 11, has an Earnings ESP of +4.17% and currently holds a Zacks Rank #3.

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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