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What's in the Offing for Duke Realty's (DRE) Q1 Earnings?

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Zacks Equity Research
·6 min read
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Duke Realty Corp. DRE is scheduled to report first-quarter 2021 earnings on Apr 28, after the market closes. The company’s results are likely to reflect year-over-year growth in both its funds from operations (FFO) per share and revenues.

In the last reported quarter, this industrial real estate investment trust (REIT) delivered an in-line performance in terms of FFO per share. Results reflected growth in rental rate, improved occupancy and leasing of new developments being placed into service.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on two occasions, matched in another and missed in the other. It has a trailing four-quarter negative surprise of 0.11%, on average. 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 and EPS Surprise

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

Factors to Note

The U.S. industrial market had an impressive start to this year with robust demand and record-high rents. What is encouraging is that demand outpaced supply for the first time since second-quarter 2019, per a report from Cushman & Wakefield CWK.

There was a net absorption of 82.3 million square feet (msf) of space during the March-end quarter. The tally is, in fact, up 78.2% over the 46.2 msf reported in first-quarter 2020. Particularly, warehouse/distribution space emerged as the strongest secondary property type. For the 21st consecutive quarter, new leasing activity exceeded 100 msf and came in at 193.8 msf. This reflects the surge in digital sales, driving e-commerce leasing together with third-party logistics providers, which helped warehouses/distribution spaces. New supply aggregated 66.4 msf at the end of first-quarter 2021, reflecting a 14.8% decline from the 77.9 msf reported in the year-earlier period.

The U.S. industrial vacancy rate came in at 4.9% at the end of first-quarter 2021, shrinking 30 basis points (bps) quarter over quarter and flat year on year. Continued tight market conditions and solid demand supported rent growth during the March-end quarter, which increased 7.8% year on year. Particularly, asking rent of $6.90 per square foot during the quarter in discussion turned out to be another record high rental rate for the U.S. industrial market. In addition, the current industrial construction pipeline reached a new record high for the market to 397.1 msf.

Duke Realty’s 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 during the January-March quarter. Its diversified portfolio of roughly 159 million rentable square feet, positioned in 20 major U.S. logistics markets, is likely to have witnessed encouraging demand from e-commerce and traditional distribution customers for its industrial properties. As such, the company’s performance is likely to have been driven by continued rental rate growth in the quarter under review.

The REIT has announced eight development starts’ execution since the beginning of the current year through mid-March, aggregating $373 million. These projects are in coastal Tier 1 markets, and in in-fill sites in other Tier 1 markets and are 58% pre-leased in the aggregate. Encompassing a total of 3.7 million square feet, these new development starts are expected to get LEED certification. The projects comprise both build-to-suit and speculative ones.

Moreover, Duke Realty enjoys a strong balance sheet, ample liquidity and easy access to capital. During the quarter, the company announced the closing of refinancing of its revolving credit facility with sustainability-linked pricing incentive. The move has also helped lower its borrowing costs from the prior facility. The company’s operating partnership has amended and restated its $1.2-billion unsecured revolving credit facility. The facility will now mature in March 2025 and allows two six-month extensions. Further, it includes an uncommitted incremental facility that enables the facility to be enhanced by up to $800 million.

Notably, the Zacks Consensus Estimate for first-quarter FFO per share is pegged at 39 cents, suggesting a year-over-year improvement of 18.2%. The consensus estimate for quarterly revenues of $249.8 million indicates growth of 14.2% year on year.

However, during the last earnings announcement, management had noted that some tenants, concentrated in event planning and other industries have been significantly affected by the pandemic and are terminating in early 2021, which will lead to a slight near-term drag on occupancy.

Nonetheless, with the asset category being an attractive one in the current challenging times, there is a development boom in some markets. This high supply is likely to have intensified competition and curbed pricing power during the March-end quarter. As such, the Zacks Consensus Estimate of FFO per share for the first quarter remained unchanged over the past 30 days.

What Our Quantitative Model Unveils:

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.

Duke Realty currently carries a Zacks Rank #2 (Buy) and an Earnings ESP of -2.15%.

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:

Digital Realty Trust, Inc. DLR, scheduled to report quarterly numbers on Apr 29, currently has an Earnings ESP of +1.06% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CubeSmart CUBE, slated to release quarterly numbers on Apr 29, has an Earnings ESP of +3.14% and carries a Zacks Rank of 3 at present.

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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Duke Realty Corporation (DRE) : Free Stock Analysis Report

Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report

CubeSmart (CUBE) : Free Stock Analysis Report

Cushman & Wakefield PLC (CWK) : Free Stock Analysis Report

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