EUR 850.00 For Business Accounts Only

Morningstar | Duke Realty Starts 2019 on Strong Footing

No-moat-rated Duke Realty reported a strong first quarter as secular tailwinds continue to benefit the industrial REITs. Funds from operations grew 10% from the linked quarter in 2018 due to both external growth and same-store net operating income growth. We continue to think that e-commerce demand for warehousing space is unlikely to subside, and the major question on our mind is the extent to which Duke Realty chooses to push pricing or occupancy. We do not plan to make a material change to our fair value estimate of $30 per share but may update it as we fully incorporate quarterly results.

Same-store cash net operating income grew at an exceptional 7.2% year over year, which we think is largely a continuation of the demand outpacing supply story that we have seen over the past year for Duke Realty. Same property occupancy increased 10 basis points quarter over quarter to 98.6%, which is a historically high number. In addition to occupancy gains, cash releasing spreads remained high at 9% this quarter, which indicates that industrial REITs continue to have pricing power in this hot market. We expect that the limiting factor for Duke Realty’s pricing power will be the extent to which new supply enters supply-constrained urban areas since consumers are increasingly demanding rapid shipping.

Given the competitively low cap rates on industrial properties, we appreciate Duke Realty's focus on developing, rather than acquiring properties. We expect that the company’s strategy of building large built-to-suit properties will likely help it continue to win contracts with large e-commerce companies. That said, we note that Duke Realty is leveraging up to fund these projects, which puts it modestly more at risk in the event of a macroeconomic shock.