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What's in the Offing for Duke Realty's (DRE) Q2 Earnings?

Duke Realty Corp. DRE is scheduled to report second-quarter 2020 earnings on Jul 29, after the market closes. The company’s results will likely reflect year-over-year growth in its funds from operations (FFO) per share and revenues.

In the last reported quarter, this industrial real estate investment trust (REIT) posted a negative surprise in terms of FFO per share.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on one occasion, met estimates in the other two and missed in another, the average negative surprise being 0.71%. 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-eps-surprise | Duke Realty Corporation Quote

Let’s see how things have shaped up prior to the second-quarter earnings release.

Factors at Play

In a rising e-commerce market, the industrial real estate asset category has continued to play a key 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 have been witnessing solid pricing, occupancy and growth in rentals. Furthermore, social distancing needs and stay-at-home orders have particularly prompted order of more goods online. Also, apart from e-retail, companies are making strategic moves to improve their supply-chain efficiencies, propelling demand for logistics infrastructure and efficient distribution networks.

Per a report from CBRE Group CBRE with low vacancy rates, record-high asking rents and positive net absorption, the industrial real estate market has shown resilience in the second quarter amid the coronavirus crisis. There has been a notable increase in e-commerce’s share of total retail sales, spurring demand for warehouse and distribution space.

Overall industrial net absorption totaled 19.2 million square feet in the second quarter, while average asking rents continue to increase. Average asking rents finished the mid-year at $7.96 per square feet, displaying a 6.3% increase year on year.

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 June-end quarter. Its diversified portfolio of roughly 156 million rentable square feet positioned from coastal ports to thriving inland hubs is likely to have witnessed solid demand from e-commerce and traditional distribution customers for the company’s industrial properties.

Moreover, per its Jun 1 operational update, Duke Realty collected 98.3% of the originally-billed April rents, with combined collections and deferrals aggregating 99.8%, and 95.4% of the originally-billed May rents with combined collections and deferrals totaling 99.1% as of May 31, 2020. The company also noted that collection of May rents were at a faster pace than April’s.

The company also stated that bulk of rent deferral requests have been denied, while total amount of deferrals granted denotes less than 1% of annual revenues. It apprised that in California and New Jersey, the two states having several eviction moratoriums, during April and May, the company managed to collect 100% of the rent.

Moreover, Duke Realty’s leasing activity for April and May aggregated 4.5 million square feet. With 847,000 square feet of leases being signed in its speculative development pipeline, the company has achieved 68% of pre-leasing level in the development pipeline, up from 61% as of Mar 31, 2020, reflecting decent demand for its properties.

The Zacks Consensus Estimate for second-quarter revenues is pegged at $221.3 million, indicating a year-over-year improvement of 3.8%.

Nonetheless, though industrial real estate fundamentals seemed more resilient than other asset categories, are not immune. The current slowdown in the economy is likely to have affected demand for space in some markets in the quarter to be reported. Rent relief and deferrals might have been an issue, specifically, for the company’s smaller tenants that have been adversely impacted by the pandemic.

Amid these, prior to the second-quarter earnings release, there is lack of any solid catalyst for becoming optimistic about the company’s prospects. The Zacks Consensus Estimate of FFO per share for the second quarter remained unchanged at 37 cents, over the past 30 days. Nevertheless, the figure suggests a year-over-year increase of 2.8%.

Here is what our quantitative model predicts:

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 has an Earnings ESP of 0.00%.

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:

SBA Communications Corporation SBAC, set to report quarterly numbers on Aug 3, currently has an Earnings ESP of +4.48% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Iron Mountain Incorporated IRM, slated to release second-quarter earnings on Aug 6, has an Earnings ESP of +4.76% 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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