In a growing e-commerce market, the industrial real estate asset category has grabbed headlines and continues to play a pivotal role, transforming the way how consumers shop and receive their goods. 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. Furthermore, demand for distribution space has been rising as e-commerce continues to expand to sectors like grocery and furniture. Apart from e-retail, food & beverage and home improvement companies are helping drive leasing activities.
This, in turn, is spurring demand for industrial/warehouse spaces, enabling industrial landlords like Duke Realty Corp. DRE, Prologis Inc. PLD, Rexford Industrial Realty, Inc. REXR and Terreno Realty Corporation TRNO, among others, to enjoy a favorable market environment.
Duke Realty remains well poised to grow, backed by its balance-sheet strength. The company has also been actively banking on its growth opportunities through acquisitions and developments.
Also, shares of Duke Realty have outperformed the industry it belongs to so far in the year. This Zacks Rank #2 (Buy) company’s shares have gained 31.7% compared with the industry’s 22.5% growth. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here’s What Might Drive the Stock Higher
Domestic pure-play industrial real estate focus: Duke Realty has several years of experience in operation and development of industrial real estate. It focuses on having facilities in major MSA’s 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. Moreover, in the recent years, the company opted for a series of asset sales to complete the disposition of its medical office properties and residual suburban office properties. These dispositions have helped the company simplify its business model and turn it into a leading domestic pure-play industrial REIT. Additionally, 16% of the company’s tenant base is e-commerce oriented, enabling it to tap growth opportunities from the e-commerce boom. Further, it is making efforts to increase exposure in Tier 1 markets to 70% (on gross asset value basis) by 2021 end through disciplined capital-recycling efforts.
Acquisitions and Developments: Duke Realty is focused on building a superior portfolio through acquisitions and development, on a speculative and build-to-suit basis, in high-barrier markets with solid growth potential. In fact, given development starts so far this year and solid build-to-suit prospects, the company raised its guidance for development starts to $1-$1.15 billion from the prior expectation of $900 million-$1.1 billion. Also, estimates for building acquisitions were increased to the range of $175-$225 million from $100-$200 million predicted earlier.
Balance Sheet Strength and Cash Flow Growth: With a flexible balance-sheet position, Duke Realty is well poised to capitalize on growth opportunities and address debt maturities in the future. In fact, the company does not have any significant debt maturities until 2022. It exited third-quarter 2019 with $121.2 million of cash and cash equivalents, up from $17.9 million as of Dec 31, 2018. The company enjoys investment-grade debt ratings of BBB+/Baa1 by Standard & Poor’s and Moody’s, respectively. Moreover, the company’s current cash flow growth of 21.26% compares favorably with the 12.76% increase estimated for the industry.
Superior Return on Equity (ROE): Duke Realty’s ROE is 8.49% compared with the industry average of 4.54%. This highlights that the company reinvests more efficiently compared with the industry.
Estimate Revision Trends: In addition, the trend in estimate revisions of 2019 and 2020 funds from operations (FFO) per share indicates a favorable outlook for the company. In fact, the Zacks Consensus Estimate for 2019 and 2020 FFO per share has been revised upward 0.7% and 1.3%, respectively, in two months’ time. Therefore, given the improvement on fundamentals and positive estimate revisions, the stock has decent upside potential.
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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