The industrial asset category has been displaying resilience amid the coronavirus pandemic with low vacancy rates, high asking rents and robust rent collections. There has been a notable increase in e-commerce’s share of total retail sales, spurring demand for warehouse and distribution spaces. Also, apart from the fast adoption of e-commerce, the industrial real estate space is anticipated to benefit over the long run from a likely increase in inventory levels by companies as a precaution for any supply-chain disruptions.
This, in turn, will likely keep supporting industrial landlords like Duke Realty Corp. DRE, Prologis, Inc. PLD, Industrial Logistics Properties Trust ILPT and Terreno Realty Corporation TRNO , among others.
Particularly, Duke Realty, which has emerged as a domestic pure-play industrial real estate investment trust (“REIT”), is well positioned to bank on the favorable environment backed by its solid operating platform and robust scale. The company, which enjoys a strong footing in this asset category, is witnessing solid demand for its industrial real estates, as reflected by the leasing and rent collection levels of the properties. Moreover, the company registered same-property net operating income growth of 5% year over year. This uptick was backed by increased occupancy and rental rate growth as well as the expiration of free rent periods. Duke Realty reported overall cash and annualized net effective rent growth on new and renewal leases of 17.2% and 32.1%, respectively, during the third quarter.
Moreover, the company is making efforts to improve its portfolio on the back of development and acquisitions in strategic markets with solid growth potential. In December, the company raised the guidance for 2020 development starts to $775-$850 million from the prior estimate of $650-$800 million, following significant development transactions since the beginning of the current quarter. With a robust pipeline of development, both build-to-suit and speculative, as well as an active pipeline of build-to-suit prospects, Duke Realty is well poised to enhance its presence in Tier 1 markets.
Further, the company enjoys a strong balance sheet, ample liquidity and easy access to capital. The company ended the third quarter with $1.2 billion of liquidity. Moreover, Duke Realty maintains high unencumbered asset pool with 98% of unencumbered assets in its portfolio. It also has no significant debt maturities until 2023. Given its balance sheet’s strength and prudent financial management, the company is well poised to bank on growth opportunities.
In addition, the trend in estimate revisions for the current quarter and 2021 funds from operations (“FFO”) per share indicates a favorable outlook. The Zacks Consensus Estimate for the fourth quarter and 2021 FFO per share have been revised 2.5% and 3.8% upward, in two months’ time to 41 cents and $1.63, respectively. Therefore, given the progress on fundamentals and upward estimate revisions, there is decent upside potential to the stock.
However, with the asset category being attractive amid these challenging times, there is a development boom in some markets. This high supply is likely to fuel competition and curb pricing power.
Additionally, industrial real estate fundamentals, though seem more resilient than other asset categories, are not immune. There is continued uncertainty across the globe, and thus the pandemic’s adverse impact on the economy might hurt demand for spaces in the near term.
Shares of Duke Realty have outperformed the industry it belongs to in the past six months. This Zacks Rank #3 (Hold) company’s shares have gained 13.6%, while the industry has rallied 6.1% during the same time frame. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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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Prologis, Inc. (PLD) : Free Stock Analysis Report
Duke Realty Corporation (DRE) : Free Stock Analysis Report
Terreno Realty Corporation (TRNO) : Free Stock Analysis Report
Industrial Logistics Properties Trust (ILPT) : Free Stock Analysis Report
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