Morningstar | Duke Realty Posts Another Strong Quarter; Shares Fairly Valued
Duke Realty posted solid third-quarter results due to favorable industry conditions, and we are planning on maintaining our $30 per share fair value estimate and no-moat rating. Duke beat our revenue expectations, but this was mostly due to a strong year in the firm's general contractor and service fee revenue. We do not think these contractor and service fees are part of Duke's core business, so we do not believe that the revenue beat should be a deciding factor for investors. Duke’s softer occupancy, down 30 basis points to 97.9% on its stabilized in-service portfolio, partially offset its revenue beat, but we think the company’s occupancy is still higher than it should be on a normalized basis. The net result of these factors is that Duke Realty posted a solid $0.03 beat on our quarterly funds from operations estimate ($0.35 per diluted share actual versus $0.32 expected), which puts the company on a good run rate to meet our annual bottom-line expectations. Currently, the stock is trading modestly below our fair value estimate, but we would advise potential investors to wait for a larger margin of safety before buying this no-moat stock.We were encouraged to see that Duke’s development portfolio and disposition policy remain well on track to meet the firm’s long-term goals. We estimate that the company will increase the square footage of its in-service portfolio by 6.7% over the next three quarters, which is roughly in line with our expectations. We were pleased to see that management raised its estimates of the percentage of the portfolio leased from the start of the year, which indicates to us that these speculative properties will likely get leased quickly. Although it is concerning to see that cap rates on 2018 dispositions are increasing from 4.7% in the first quarter to 5.3% this quarter, we recognize that the company is disposing of data centers that are not in line with the firm’s strategic vision. Overall, we are generally in agreement with the company’s external growth policy and think that the firm is successfully positioning itself as the largest pure-play domestic U.S. industrial REIT.
Duke Realty is a self-administered and self-managed real estate investment trust and is the sole general partner of Duke Realty Limited Partnership and its consolidated subsidiaries. The company and Partnership focuses on the ownership, management and development of bulk distribution (industrial) real estate. The company has two reportable operating segments. The first consisting of the ownership and rental of industrial real estate investments. The company's second reportable segment consists of various real estate services such as property management, asset management, maintenance, leasing, development, general contracting and construction management to third-party property owners and joint ventures.
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